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C^EffilGRT DEPOSm 



rWENTIETH CENTURY TEXT-BOOKS 

EDITED BY 

A. F. NIGHTINGALE, Ph.D., LL.D. 

SUPERINTENDENT OF SCHOOLS, COOK COUNTY, ILLINOIS 



^.M 



_^ 






THE ESSENTIALS 
OF BUSINESS LAW 



BY 

FRANCIS M. BURDICK 

DWIQHT PROFESSOR OF LAW IN COLUMBIA UNIVERSITY LAW SCHOOL 




D. APPLETON AND COMPANY 

NEW YORK AND LONDON 

1919 



tu^^h^'^\ 



HF/237 



Copyright, 1902, 1908, 1919, 

Bt d. appleton and company 



8K2«8aiS 



Printed in the United States of America 

©)CI.A561105 



PREFACE 



This book has not been written for lawyers, nor for 
professional students of the law, but for boys and girls 
in our secondary schools. Its purpose is to show how the 
rules of law, governing ordinary business transactions, 
have been developed, and to tell what they are. Technical 
law terms have been discarded as far as possible. When 
they have been used, care has been taken to explain and 
illustrate their meaning, so as to render them easily intel- 
ligible to every attentive student. 

The author believes that the average high-school boy 
or girl can acquire an accurate knowledge of the essential 
principles of business law if these are set forth in clear, 
lucid, popular language. He has endeavored so to present 
them in the following pages. He has no idea that a mas- 
tery of this book will fit the student for a bar examination, 
or will enable him to be his own lawyer. He has the con- 
viction, however, that it will give the student a fair ac- 
quaintance with those legal principles and ideas which are 
involved in ordinary business affairs, and that it will help 
him to know when he ought to consult a lawyer, in order 
to avoid business pitfalls. 

It is hoped that the book will disclose to the reader the 
meaning of many legal terms which are constantly thrust 



VI ESSENTIALS OF BUSINESS LAW 

before him, in conversation and in the newspapers; that 
it will show him how to make, indorse, and use checks and 
other forms of negotiable paper ; that it will teach him his 
rights against hotel-keepers, common carriers, and many- 
others, as well as give him much useful information about 
the purchase and sale, the transfer and conveyance of land 
and of personal property. 

Francis M. Buedick. 
Columbia University. 



PREFACE TO REVISED EDITION 

The rules of commercial law in this country have been 
modified by legislation since the first publication of this 
book. Many statutes have been drafted by the Commission- 
ers on Uniform State Laws and enacted by various legis- 
latures, having for their object not simply the codification 
of the older law, but its reformation in many respects to 
suit modern business practices and needs. 

It has seemed desirable to incorporate these legislative 
changes into the text, and to note their importance. The 
student will observe that the law of partnership, of the sale 
of personal property, of bailments — especially those which 
involve the use of warehouse receipts and bills of lading — 
and the law relating to transfers of title to real property, 
have been modified, and, in most respects, simplified and re- 
formed by statutes, whose provisions have been summarized 
in this revision. Some of these Uniform State Laws have 
been adopted by many legislatures and most of them prob- 
ably will be adopted by all of the States, thus bringing about 
a uniformity in business law throughout our country which 
is most desirable. 

Important changes in commercial law and business prac- 
tices have been effected by Congressional legislation re- 
lating to interstate commerce, monopolies, postal bail- 
ments, corporations, public utilities and banking. This 
revision attempts to bring the text down to date upon all 
of these topics. 

Francis M. Bukdick. 
Columbia University, 



CONTENTS 



CHAPTER I 
INTRODUCTORY 

The Nature and Origin of Municipal Law 

1. The study of municipal law .... 

2. Municipal law and the theory of a social compact 

3. The social-compact theory exploded 

4. Law develops as man improves his condition 

5. Law was not invented, but grew . 

6. Judicial decisions gave rise to legal rules . 

7. Conveyance with copper scales . 

8. The Roman law of contracts 

9. Law is common sense, but clothed in technical forms 



PAGE 

1 
2 
3 

4 
4 
5 

6 

7 
8 



CHAPTER II 
THE LAW MERCHANT AND THE COMMON LAW 

§ 1. The Law Merchant 

10. The sources of modern business law are twofold 

11. Their differences illustrated 

12. Survivorship at common law 

13. No survivorship between partners 

14. Effect of death on outstanding contracts 

15. Merchants' courts 

16. Judges and juries of merchants' courts 

17. These courts called pepoudrous . 

18. Modern ignorance of the ancient law merchant 

19. Fragments of the laAv merchant in sea codes 

20. The ancient law merchant was international 

21. Difficulty in applying this law of nature . 

22. Decay of merchants' courts 

23. Merchants' courts in America . 



10 
10 
11 
11 
11 
12 
13 
13 
14 
15 
15 
16 
16 
17 



X ESSENTIALS OF BUSINESS LAW 

PAGE 

24. The law merchant in common-law courts. Second stage in 

its development . . . . . . . .18 

25. Parliament backs the merchants . . . . . .19 

26. Third stage in the development of the law merchant . . 19 

27. Lord Mansfield's methods 20 

28. Fourth stage in the development of the law merchant . 21 

29. Summary: Four meanings of "law merchant" . . .22 

§ 2. The Common Law 

30. Various significations of the term 23 

31. Common law is unwritten ....... 23 

32. The second signification modified in many States . . 24 

33. Common law as the law of certain courts . . . .25 

34. Merger of common-law and equity courts . . . .25 

35. Origin of the common law ....... 26 

36. Common-law courts were deliberate and spectacular . . 26 

37. Eecorded precedents 28 

38. Unfortunate precedents 28 

39. Getting rid of inequitable precedents . . . .29 

40. Legislative correction of precedents . . . . .30 

41. Distinguishing and limiting precedents . . . .30 

42. Principles deducible from recorded cases . . . .30 

43. Flexibility of the common law .31 

43. (a) Specific rules of common law 32 

CHAPTEE III 

CONTRACTS 

§ 1. How A Contract is Made 

44. A knowledge of the principles governing contracts is im- 

portant 33 

45. Definition and essentials of contract . . . . .33 

46. Obligations which are not true contracts . . . .34 

47. Quasi contracts ......... 34 

48. Contract may be made by acts ...... 35 

49. Offer and acceptance ........ 35 

50. Intention to contract ....... 36 

51. Preliminary negotiations 36 

52. Offer must be definite 37 

53. Definiteness of promise . . . . . . .38 

54. Acceptance must be absolute and unqualified . . .39 



CONTENTS xi 

PAGE 

55. Eight to withdraw offer 40 

56. How offer may be withdrawn 40 

57. The lapsing of an offer ....... 41 

58. Death of the offerer . . . ... . .41 

59. Communication of offer 42 

60. Communication of withdrawal . . . . . . 42 

61. Communication of acceptance 43 

62. Necessity of consideration 44 

63. Contracts under seal 44 

64. A deed . . . .45 

65. What constitutes a seal . . . . . . .46 

66. Delivery of a deed . . 46 

67. Deed differs from simple contract, (a) In respect of con- 

sideration . . . . . . . . . .46 

68. (6) Delivery upon condition .. . . . . . '47 

69. (c) Estoppel by deed . .48 

70. id) Merger .48 

71. (e) Specialty creditors preferred . . . . . .48 

72. (/) Limitations of actions ..,.,,, 49 

73. ig) Statutory changes 49 

74. The doctrine of consideration . . . . . .49 

75. Definition of the term 50 

76. Surrender of a legal right 50 

77. Forbearance of a legal right . . , . . . .51 

78. At the request of the promisor 51 

79. Artificiality of this doctrine .52 

80. The Statute of Frauds 52 

81. Evils resulting from the statute 53 

82. Sections IV and XVII 54 

83. Contracts are not void which fail to comply with the 

statute . . . . . . . . . .55 

84. These sections have promoted artificial and technical rea- 

soning 55 

85. The statute as a nuisance 56 

§ 2. Capacity of Parties 

86. Persons engaged in business are generally capable of con- 

tracting 57 

87. The capacity of aliens to contract . . . . .57 

88. Common-law incapacity of married women . . . .58 

89. Incapacity of convicted criminals to contract . . .58 

90. Incapacity of infants 59 



xii ESSENTIALS OF BUSINESS LAW 

PAGE 

91. When the period of infancy terminates . . . .59 

92. The legal force of infants' contracts . . . .60 

93. Agreements by infants for necessaries are not true con- 

tracts 60 

94. What are necessaries? 61 

95. Ratification of contracts by infants . . . .62 

96. Limitations upon the infant's right to repudiate . . 63 

97. Right to repudiate is personal to the infant . . .64 

98. Contract of marriage can not be rescinded by an infant, 

but a contract to marry can . . . . . .64 

99. The contracts of lunatics and drunkards . . . .64 

100. The English rule. American modifications . . .65 

§ 3. Illegal Agreements 

101. Illegal promises not enforceable by the law, and hence 

not contracts 66 

102. Express prohibition or criminality of promise not essen- 

tial 66 

103. Other instances of illegal contracts . . . . .67 

104. Reasons for holding contracts in total restraint of trade 

void 67 

105. Rule laid down by House of Lords and Supreme Court . 68 

106. Public policy an unruly horse 69 

107. Stifiing competition and monopolizing trade . . .70 
107. (a) Legislation against monopolies 70 

107. (6) State legislation 71 

§ 4. Want of Mutual Assent 

108. Cases of apparent but unreal assent 72 

109. Nature and consequences of mistake . . . . .72 

110. Mistake by one party to the contract . . . .73 

111. Mistake due to the act of a third party . . . .74 

112. Mistake as to the existence of the subject-matter . . 74 

113. Mistake as to the identity of the subject-matter . . 75 

114. Nature and consequences of misrepresentation . . .75 

115. Misrepresentation may be made a term of the contract . 76 

116. Practical wisdom of this rule 77 

117. Fraud: meaning of, in law of contracts . . . .77 

118. Fraud involves the idea of active misconduct . . .78 

119. Non-disclosure of the truth in connection with other cir- 

cumstances ......... 78 

120. Acts may speak louder than words 79 



CONTENTS 



Xlll 



party 



121. Misstatement of fact, not of opinion . . . . 

122. Misstatement of fact, which buyer ought not to rely on 

123. False statement need not be the sole inducement 

124. The rights of the defrauded party . . . . 

125. Disaffirmance must be made promptly 

126. Duress. Its various forms and consequences . 

127. Duress by threats of injury to person or property 

128. Duress by threats of imprisonment . 

129. Threats against the contracting party's relatives 

130. Duress must be caused or be adopted by the other 

to the contract 

131. Undue influence defined . . 

132. Relation of undue influence to fraud . 

133. Rights of the victim of undue influence . 

§ 5. Persons Affected by a Contract 

134. Rights and obligations under a contract are generally lim- 

ited to the parties 

135. Substitution of third parties may be provided for in the 

contract 

136. Interference by outsiders with the obligations of contract 

137. Rights of third persons under a contract .... 

138. Reasons for the American exceptions 

§ 6. Assignment of Contract 

139. Liabilities under a contract not assignable 

140. The assignability of rights under a contract . 

141. Notice of assignment should be given 

142. Assignee is subject to defenses against his assignor 

143. Assignment by operation of law .... 

§ 7. Discharge of Contract 

144. Executory contracts may be discharged by mutual consent 

145. Contracts executed by one party can be discharged only 

by performance or release 

146. Discharge by substitution of new contract. Novation 

147. A contract may be discharged by the happening of a stip- 

ulated event 

148. Discharge by performance ..... 

149. Tender of performance ..... 

150. Legal-tender money of the United States . 

151. Consequences of breach of contract by one party 



PAGE 

80 
80 
81 
81 
82 
82 
83 
84 
84 

84 
85 
85 
86 



86 

87 
88 
89 
89 



90 
90 
91 
91 
92 



93 

93 
94 

94 
95 
95 
96 
96 



ESSENTIALS OF BUSINESS LAW 



L52. When does a breach by one party discharge the other? 97 

153. Breach of a term, which is not of vital importance . . 97 

154. Breach of a vital or fundamental term . . . .98 

155. Effect of repudiation of contract by one party, before 

performance by him is due ...... 99 

155. (a) Impossibility of performance 100 



CHAPTER IV 

AGE^^CY 

§ 1. How THE Relation is Formed axd Tebminated 

156. Definition of agency 101 

157. Agency may result from appointment or from ratification 101 

. 101 
. 103 
. 104 
. 105 
. 105 
. 106 



158. Conditions of ratification 

159. Agency by operation of law .... 

160. Legal capacity of principal and of agent . 

161. Master and servant ...... 

162. Classification of agents: general and special agents 

163. Attorney at law and attorney in fact . 

164. The authority of an attorney at law is regulated 

largely by the rules or usages of courts . 

165. Auctioneers . . . . . . . 

166. Bank cashiers 

167. Brokers 

168. Factor, or commission merchant . . . , 

169. Ships' husbands and masters of ships 

170. Termination of agency ..... 

171. Notice of termination . . . . . 



very 



106 
108 
109 
109 
110 
111 
112 
113 



§ 2. Prixcipal's Liability for Agent's Acts 

172. His contract liability 114 

173. Meaning of scope of apparent authority . . . .114 

174. The principal's liability in tort 115 

175. Acts done outside the scope of apparent authority . .116 

176. Liability for agent's wilful or malicious acts . . .118 

177. Principal may be liable to criminal punishment for agent's 

acts 118 

178. Distinction between agent or servant and independent 

contractor 119 



CONTENTS XV 

PAGE 

§ 3. Principal's Rights Acquired through Acts of Agent 

179. In case of a disclosed principal . . . . .119 

180. In case of an undisclosed principal ..... 120 

§ 4. The Agent's Liability to Third Persons 

181. His liability in tort .120 

182. His contract liability 120 

183. The agent's liability for unauthorized contracts . . 120 

184. The agent's liability upon contracts improperly executed 121 

§ 5. The Agent's Rights Against Third Persons 

185. In case of contracts . . 122 

186. In case of tort . . 122 

§ 6. Duties of the Principal and Agent toward Each Other 

187. Duties of the principal toward the agent .... 123 

188. Duties of the agent toward the principal .... 123 

§ 7. Master's Statutory Liability for Servant 

188. (a) Fellow-servant doctrine 124 

188. (6) Statutory modifications of rule 125 

188. (c) Workmen's Compensation Acts 125 



CHAPTER V 

BAILMENTS, INCLUDING THE OBLIGATIONS OF POSTMAS- 
TERS, INNKEEPERS, COMMON CARRIERS, AND TELE- 
GRAPE COMPANIES 

§ 1. Nature and Classification of Bailments 

189. Origin and modification of the term .... 127 

190. Bailee's duty may result from agreement or from a rule 

of law 128 

191. Bailment is confined to personal property, which must be 

delivered over in specie 129 

192. Classification of bailments 130 

§ 2. Bailments for Bailor's Exclusive Benefit 

193. The special purpose of these bailments .... 130 

194. Termination of these bailments 131 

195. Duty of the bailee while the bailment continues . . 131 



xvi ESSENTIALS OF BUSINESS LAW 

PAGE 

§ 3. Bailments foe the Bailee's Sole Benefit 

196. The bailee's duty 132 

197. Must exercise extraordinary care 133 

198. Bailee has no right to lend the property .... 133 

199. The bailor's duty 133 

§ 4. Bailments for Mutual Benefit. General Principles 

200. Nature and classification of mutual benefit bailments . 134 

201. Duties of the bailee 135 

202. Duties of the bailor 136 

§ 5. Pawn, Pledge, or Collateral Security 

203. Nature of this bailment 136 

204. Possession by the pledgee ....... 137 

205. Bights of the pledgee 137 

206. Duties of the pledgee 138 

207. Pawnbrokers 139 

§ 6. Postal Bailments 

208. Their peculiar character 140 

209. Liability of postal officers 141 

210. Summary 141 

210. (a) Non-liability of government 142 

210. (6) Parcel-post' 142 

210. (c) United States not suable 143 

210. id) United States may sue 144 

§ 7. Innkeepers 

211. Definition 144 

212. Whom must the innkeeper receive? 145 

213. Treatment of sick guests 146 

214. Innkeeper's liability for personal injuries to guest . . 147 

215. Innkeeper's liability for guest's property .... 148 

216. Statutory modification of innkeeper's liability . . . 148 

217. The common-law exceptions to liability .... 149 
218 Who is a guest? 151 

219. Rights of the innkeeper . . . • . . . . 152 

§ 8. The Hired Use of Chattels 

220. A common kind of bailment ♦. . 152 

221. The bailee may be liable for conversion .... 153 



CONTENTS 



§ 9. Hired Services about Chattels, other than the 
Services of Common Carriers 

222. Why this class of bailments is separated from common 

carriage ...... 

223. Warehousemen and warehouse receipts 
223. (a) Uniform vi^arehouse receipt act . 
223. (6) Who is a warehouseman 

223. (c) The receipt 

223. {d) Negotiability of receipt 

223, (e) Warehouseman's lien . 



154 
155 
155 
156 
156 
157 
158 



§ 10. Common Carriers of Goods 

224. Definition and general duty 158 

225. Excuses for refusing to carry ....!. 159 

226. Common carrier's liability for goods received . . '. 159 

227. Exceptions to the rule of liability . . . . .160 

228. When the carrier's liability begins 161 

229. Termination of carrier's liability 162 

230. Modification of carrier's liability by contract . . . 163 

231. Reasonable and fair regulations ...... 164 

232. Statutory modifications of carrier's common-law liability 165 

233. Lien of common carriers 166 

233. (a) Interstate Commerce Commission .... 167 

233. (&) Liability of first carriers 168 

233. (o) Bills of lading .168 

233. id) Statutory provision .169 

§ 11. Common Carriers of Passengers 

234. Duty to receive passengers 170 

235. Care of passengers 171 

23G. Accommodations for passengers . . . . ' . . 172 
237 Treatment of passengers 172 

238. Limitation of carrier's liability by contract . . . 173 

239. Carrier's liability for passenger's baggage . . . 174 

240. Fault of the passenger 175 

241. Termination of carrier's liability 175 

§ 12. Telegraph and Telephone Companies 

242. Not common carriers 176 

243. Nature of the company's liability 176 

244. Liability may be limited or enlarged by contract . . 177 

245. To whom the company is liable 178 



ESSE^^TIALS OF BUSINESS LAW 



§ 13. Public Utilities 
245. (a) Test of a public utility. 
245. (6) Public utility commissions . 
245. (c) Limit of regulation 
245. {d) Control of business during war . 



179 
179 
180 
181 



CHAPTEE VI 



BANKRUPTCY AND INSOLVENCY 



246. The severity of early bankruptcy laws 

247. The rigor of early law has been softened 

248. Distinction between insolvent and bankruptcy 

249. Bankruptcy legislation in the United States 

250. State bankruptcy laws are now suspended 

251. The theory of bankruptcy legislation 

252. Who may be declared bankrupt 

253. What are acts of bankruptcy? . 

254. Courts; referees; trustees . 

255. Discliarge of a bankrupt . 





184 




185 


y laws 


185 




186 




187 




187 




188 




188 




189 




190 



CHAPTEE YII 



INSURANCE 



256. Its nature and origin ....... 191 

257. Origin of insurance . . . . . . . . 192 

258. Insurance law based upon mercantile usage . . . 192 

259. The earliest form of insurance 193 

260. Fire and life insurance ....... 194 

261. Other forms of insurance ....... 194 

262. Insurance is a contract, and generally in writing . . 194 

263. Representations and non-disclosure by the insured . . 195 

264. Foregoing doctrine modified in life and iire insurance . 196 

265. Warranties in insurance 196 

266. Waiver and estoppel 197 

267. Insurance as a contract of indemnity ..... 107 

268. Insurer's rights under principle of indemnity . - . . 198 

269. The principle of indemnity and life insurance . . . 199 

270. Various forms of life insurance 200 

271. Accident insurance 200 



CONTENTS 



XIX 



PAGE 

272. Objects and form of policy 200 

273. The cost of accident insurance 201 

274. Notice to the insurer 201 

275. Agents of insurer 202 

275. (a) Standard insurance policies 202 

275. (6) State insurance 203 

275. (o) War risk insurance 204 

CHAPTEE VIII 

NEGOTIABLE PAPER 



§ 1. Its Origin and Objects 

276. Negotiable paper originated in the usage of merchants . 206 

277. Why foreign bills of exchange were used .... 207 

278. Inland bills of exchange 208 

279. Promissory notes 208 

280. Later forms of negotiable paper 209 

281. Formal requisites of negotiable paper .... 210 

282. Parties who must sign 210 

283. An unconditional order or promise 211 

284. Time of payment 211 

285. Payable to order or bearer 212 

286. Bill of exchange must designate a drawee . . . .212 

§ 2. Liability of the Different Parties to Negotiable 
Paper 

287. Liability of acceptor 213 

288. Liability of the maker of a promissory note . . .214 

289. Other engagements of acceptor and maker . . .214 

290. Qualified acceptance 214 

291. Certified checks 215 

292. Liability of the drawer 215 

293. Liability of indorser 216 

294. Various kinds of indorsement 216 

295. Accommodation parties 217 

296. Delivery necessary to the validity of negotiable paper . 218 

§ 3. Proceedings on Dishonor 

297. How negotiable paper is dishonored 218 

298. What is due presentment? 218 

299. Time of presentment 219 



XX 



ESSENTIALS OF BUSINESS LAW 



300. Reasonable hour ... 

301. Delay in making presentment . 

302. Presentment may be dispensed with 

303. Protest of negotiable paper 

304. Why foreign bills must be protested 

305. Different significations of protest 

306. Manner of protesting paper 

307. Notice of dishonor 

308. Why notice of dishonor is required 
Time of giving notice 



309. 



PAGE 

, 220 
, 220 
, 220 
, 221 
, 221 
, 222 
, 222 
, 223 
, 224 
, 224 
225 



310. Where notice by mail should be sent 

§ 4. The Eights of a Holdeb 

311. How acquired 225 

312. A holder in due course, or bona fide ..... 226 

313. Transfer after due . 226 

314. Paper payable on demand ....... 227 

315. For value 228 

316. An old debt as value 228 

317. Taking without notice 229 

318. Holder in due course takes title free from personal de- 

fenses 229 

319. Real or absolute defenses 230 

320. Fraud in securing the signature 231 



CHAPTER IX 

PARTNERSHIP— JOINT-STOCK COMPANIES— CORPORA- 
TIONS 



PART I.— COMMON LAW PARTNERSHIPS 
§ 1. The Nature of Partnerships 

321. What is a partnership? 232 

322. The agreement of parties is essential .... 232 

323. Specific intent to form a partnership is not necessary . 233 

324. Carrying on business together. (a) It must be lawful 234 

325. (6) Meaning of business 235 

326. (o) A common business ....... 235 

327. (d) Sharing the profits of a business .... 236 

328. Business must be carried on for profit .... 236 



CONTENTS xxi 

PAGE 

§ 2. Partnership Property 

329. It starts with the firm's capital 237 

330. The firm as a person 237 

331. Partnership real 'estate 238 

332. Firm property after the death of a partner . . . 238 

333. Firm creditors and separate creditors .... 239 

334. A partner's share or interest in firm property . . . 239 

§ 3. The Powers of Partners 

335. A majority rules 240 

336. The agency of a partner 241 

337. Implied authority of a partner 241 

338. Liability for the misconduct of a partner .... 242 

339. Good faith, toward copartners . . . , , . 242 

§ 4. The Dissolution of Partnership 

340. By operation of law 243 

341. By act of the parties 244 

342. By judicial action 244 

343. Upon dissolution, firm property is to be distributed among 

the partners 244 

344. Order of distribution 245 

345. The proportion in which profits and losses are sharable 245 

§ 5. Uniform Partnership Act 

345. (a) Modified existing law 246 

345. (6) Partnership real estate ...... 246 

345. (c) A partner's share in firm property .... 247 

345. {d) Partner's agency . 247 

345. (e) Partner's liability 248 

345. (/) Partnership affairs after dissolution .... 248 

345. (ff) Order of distribution 248 

PART II 
§ 1. Limited Partnership 

346. Borrowed from French law 249 

347. Its characteristics ........ 249 

348. How limited partnerships are formed .... 249 

PART III 
§ 1. Joint-Stock Companies 

349. Are partnerships with peculiar features .... 250 

350. Mining partnerships 251 

351. Statutory joint-stock companies 251 



ESSENTIALS OF BUSINESS LAW 



PART IV 

§ 1. CORPOKATIONS 



352. An artificial or legal person 

353. How created 

354. Liability of stockholders 

355. Transferability of stock 

356. The power of stockholders 

357. Contracts by corporations 

358. Dissolution of corporations 
358. (a) Receivers 

358. (5) Federal corporations 



358. (c) LTniform stock transfer 



act 



358. {d) Supervision of corporations 



251 

252 
253 
254 
254 
255 
255 
256 
256 
257 
258 



CHAPTER X 



PROPERTY— ITS ACQUISITION AND TRANSFER 



§ 1. Nature and Forms of Property 



359. Meaning of term . 

360. Real and personal property 

361. Two forms of realty . 

362. Two forms of personalty . 

363. Realty may become personalty 

364. Personalty may become realty 



365. 
366. 
367. 
368. 
369. 
370. 
371. 



§ 2. Methods of Acquiring Property 
By one's own acts. ( a ) Occupancy . 



(a) 



(&) Title by prescription and possession 

(c) Title by natural increase 

(d) Title by one's labor 
Property acquired upon another's death. 
Who may make a will 
The formalities of a valid will . 

372. Nuncupative wills .... 

373. (5) Upon intestacy .... 

374. Acquiring property from a living owner. 

express consent 

375. ( 6 ) With the implied consent of former owner 

376. Title from living owner without his consent 



By will 



{a) 



With his 



259 
259 
260 
261 
261. 
262 



262 
263 
263 
263 
264 
265 
265 
265 
265 

266 
267 

268 



CONTENTS 



§ 3. Conveyance of Real Property 

377. Real property is transferred by a written conveyance 

378. Various kinds of deeds, (a) Quit-claim deed 

379. (&) Warranty deed .... 

380. Mortgages of land .... 

381. Wives should sign deeds and mortgages 

382. Recording of conveyances of land 

383. Abstract of title ..'... 
383. (a) Short forms of deeds and mortgages 

§ 4. Land Registration: Torrens System 

383. (6) Its origin ....... 

383. (c) Early attempts at legislation 

383. {d) Uniform land registration act . . . 

383. (e) Assurance fund 

383. (/) Subsequent transfer ..... 

383. ig) Construction of act 



268 
268 
269 
269 
270 
270 
271 
271 



271 

272 
272 
273 
273 
274 



CHAPTEE XI 
SALES OF PERSONAL PROPERTY 

§ 1. Nature and Formalities of a Sale 

384. Growing importance of this topic ..... 275 

385. Definition of sale 276 

386. Distinction between sale and similar transactions . . 276 

387. Quasi-sale 277 

388. Formalities of the sale contract 277 

389. What contracts are within the statute? .... 278 

390. The memorandum 279 

391. Part payment 280 

392. Acceptance and receipt 280 

§ 2. When Title Passes 

393. In case of bargain and sale 281 

394. The doctrine of potential existence 282 

395. In case of an agreement to sell ...... 282 

396. The intention of the parties, (a) If expressed . . . 283 

397. (&) Intention implied from conduct 283 

398. Rule First. A present sale of existing goods is presumed 284 

399. Rule Second. When goods are not in deliverable condition 284 

400. Rule Tiiird. Sale on approval 284 



ESSENTIALS OF BUSINESS LAW 



401. Rule Fourth. Subsequent appropriation of tlie goods to 

the contract ......... 285 

402. A seller who has not title can not give title . . . 286 

403. Factors acts . 286 



§ 3. Duties of the Seller 

404. These are threefold 

405. To confer title on the buyer 

406. To furnish the agreed thing 

407. Sale by description 

408. The goods must be merchantable 

409. Fit for particular purpose . 

410. Duty to give possession 

411. Where possession is to be given . 

412. Express warranties 



. 287 
. 287 
. 288 
. 288 
. 288 
. 289 
. 289 
. 290 
. 290 



291 
292 
292 



§ 4. Duties of Buyers 

413. To take title to the goods 

414. To take possession ....... 

415. To pay for the property 

§ 5. Remedies of the Seller 

416. The seller's remedy by action for the price or for damages 292 

417. The seller''s right of lien 293 

418. Right of stoppage iji transitu, (a) Its origin and nature 294 

. 294 
. 294 



419. (&) Insolvency in this connection . . . . . 

420. (c) How the right is exercised ...... 

421. {d) The common carrier is bound to comply with the no- 

tice ........... 

422. Right of resale 

§ 6. Remedies of the Buyer 

423. Actian to recover the goods .... 

424. Action to recover damages ..... 

425. Extraordinary special damages .... 

426. For breach of warranty 

427. The measure of damages for a breach of warranty 

§ 7. Uniform Sales Act 

428. Its history and character 

429. Statute of frauds 

430. Potential existence ...... 

431. Condition sales . . ^ 



295 
296 

296 
297 
297 
298 

298 



299 
299 
300 
300 



CONTENTS XXV 

PAGE 

432. Goods represented by document of title .... 300 

433. Warranties 301 



CHAPTER XII 

BANKS AND BANKING 

428. Banking business 302 

429. Classification of banks 303 

430. Savings banks 303 

431. Investment bankers . 304 

432. The commercial bank . . . . . , . . 304 

433. Deposits 305 

434. Loans and discounts 305 

435. Interest and usury 306 

436. Checks 307 

437. Forgery and alteration 308 

438. Presentment of checks 309 

439. Clearing houses 309 

440. State banks 310 

441. National banks 311 

442. Farm loan banks . 311 

443. Federal reserve banks 312 

444. International banking 313 

Appendix 315 

Practice problems 317 

Index 347 




LOED MANSFIELD. 



ESSENTIALS OF BUSINESS LAW 



CHAPTEE I 
introductoey 

The Nature and Origin of Municipal Law 

1. The study of municipal law.^In this book we are to 
consider those legal rules of civil conduct that relate espe- 
cially to the business transactions of our day. We shall not 
survey in detail the history of municipal law; and yet a 
glance at its evolution may prove helpful to the student, by 
enabling him to consider the subject from the right point 
of view. 

We have followed Blackstone ^ and Kent ^ in using the 
term " municipal law ^' to designate the Ijodij of legal rules, 
or the system of social order, which is established and 
enforced hy the state. The term itself contains quite a bit 
of history, for " municipal " carries us back to the time 

» Sir William Blackstone's Commentaries on the Laws of England, 
in Four Books, were published during the years 1765 to 1769. They 
contain the substance of lectures delivered by the author while Vine- 
rian Professor of Law in Oxford University. One of his harshest 
critics declared it was "he who first of all institutional writers 
taught jurisprudence to speak the language of the scholar and the 
gentleman," The Commentaries are a legal classic. 

^ Chancellor Kent's Commentaries on American Law, in four vol- 
umes, were the outgrowth of lectures delivered at Columbia College. 
They were published from 1826 to 1830, and are still deservedly popu- 
lar with the legal profession. 

1 



2 ESSENTIALS OF BUSINESS LAW 

when the municipium (the free city) was the typical state. 
Carthage, Athens, Rome, were examples of city states 
among the ancients, as Venice, Florence, Hamburg, Llibeck, 
Bremen, were during the middle ages, and indeed until quite 
recent times. 

2. Municipal law and the theory of a social compact. — 
It was a favorite theory about two centuries ago that all 
rules of civil conduct had their origin in what was termed 
an " original contract " or " social compact." According 
to this theory, especially as it was set forth by Rousseau 
and writers of his school, we may picture the evolution of 
municipal law somewhat as follows : 

Far back in the past, during the golden age ^ of man- 
kind, our ancestors gathered in a great plain, and there came 
to an agreement to live in political communities. Upon 
making this change from a state of nature, where every one 
had all the land and goods he needed, as well as absolute 
freedom of action, to a state of organized society, where 
each was obliged to surrender many of his natural rights, 
it became necessary to adopt forms of government as well 
as rules of conduct for the individual. The political and 
legal systems thus set up were perfect, for they conformed 
in every respect to an ideal law of nature. As mankind 
degenerated, and passed from that golden age through the 
ages of silver, of brass, and of iron, forms of government 
and rules of law became corrupted also. Kings and aris- 



^ Classical mythology, according to the poet Hesiod, divided the 
life of the human race into four periods. The golden age extended 
through the reign of Saturn, and was a period of perfect innocence, 
happiness, and simplicity, when the earth yielded spontaneously every- 
thing that was desirable for mankind. This was followed by the silver 
age, in which mankind became wicked and was obliged to toil for the 
necessaries of life. Next was the brazen age, an epoch of war and 
violence. And finally the iron age, or that in which Hesiod lived, when 
justice and piety were thought to have disappeared from the earth. 



INTRODUCTORY 3 

tocrats stole away the liberties of the people, and profes- 
sional lawyers converted a body of clear and simple rules 
into a tangled web of obscure doctrines and technical court 
procedure. In Eousseau's favorite phrase, " Man is born 
free ; and he is everywhere in chains." He would have us 
believe that the evolution of law had been downward, not 
upward ; from the reasonable to the unreasonable ; from the 
good to the bad. 

3. The social-compact theory exploded. — But this the- 
ory, that political and legal systems may be traced to their 
source in an " original contract " between the early mem- 
bers of the human race, has long been exploded. It rested 
solely upon speculation, and a careful study of history has 
shown that the conjecture was as erroneous as it was bril- 
liant. History gives us no picture of a golden age of our 
race. It has no record of a primitive community, with sim- 
ple and perfect laws. On the contrary, it shows our human 
ancestors in a state of savagery where " might makes right." 
Their code of conduct was that of Eob Roy, as sung by 
Wordsworth : 

. . . The good old rule 
Sufficeth them, the simple plan 
That they should take who have the power, 
And they should keep who can. 

Such a rule is simple, undoubtedly. It is natural, too, 
for it is borrowed from the " creatures of flood and field." 
But it is very far removed from the natural law — the 
ideal system of rules of human conduct — which Rousseau 
and his followers thought was enjoyed by primitive man. 
Indeed, it was not law at all in its modern sense. It was not 
a rule of action established by the state, which the individ- 
ual was bound to obey. Rob Roy was a lawless man. Law- 
less, too, is the human savage everywhere in his primitive 
estate. 



i ESSENTIALS OP BUSINESS LAW 

4. Law develops as man improves his condition. — As 

man advances from the savage state in which we find him 
at the dawn of profane history; as the members of a clan, 
a tribe, or other primitive commnnity, increase in numbers ; 
as their tastes and talents become diversified, and as they 
begin to accnmnlate various forms of property, the need of 
laws makes itself felt. Without them a man can not be 
secure in the possession of the fruits of his labor or skill. 
He may have made a bow and arrow, a spear, or a canoe; 
he may have captured a valuable animal or a slave. How 
shall he keep his property from the stronger arm of his 
neighbor? Only when the law of the land comes to his 
assistance and throws over him its protecting shield. 

But the development of that law was a slow, hard, 
tedious process for our early ancestors. We can not under- 
take to tell here the whole story of that evolution. All we 
shall hope to do is to trace in a very sketchy way the out- 
lines of its course, as they have been set forth by writers 
on Eoman law. We refer to this particular system of law 
because its history covers a period of a tiiousand years. 

5. Law was not invented, but grew. — One of the first 
things made clear by that history is that rules of law were 
not thought out and put into set forms of words by the 
founders of Eome. Those men, whether they were the 
mythical Eomulus and Eemus, or whether they were the 
members of an ordinary village community in ancient Italy, 
were accustomed to settle their disputes by a fight. He 
that had the best spear, the strongest arm, and the greatest 
skill in combat, invariably had the law on his side. But 
as the little city grew, and quarrels over property became 
more frequent, this method of settling them was felt to 
be wasteful of human life and altogether unsatisfactory. 
Accordingly the practise grew up of referring these dis- 
putes to the king, or to some officer chosen to act as arbi- 
trator. 



INTRODUCTORY 5 

A brief description of the oldest form of Eoman laws aits 
will show how closely it was connected with the physical 
combat for which it was a substitute. It opened with a 
mimic fight. The plaintiff, as we should call him, appeared 
before the magistrate, seized with one hand the article over 
which the dispute had arisen, and with the other laid upon 
it a rod, which was used in the place of a spear, and declared 
the property was his. The defendant did and said the same 
thing. Here we have the claimants grasping a piece of 
property and ready to try title to it by physical combat. 
Thereupon the magistrate commanded both to let go their 
hold. They obeyed, and then each stated the grounds upon 
which he claimed the article in question, after which the 
evidence was taken and the case decided. 

The decision in those far-away times would not be 
based, however, upon formal rules stating how property 
could be acquired and held, as a similar case would have 
been decided five centuries later at Eome, or as it would 
be decided with us to-day. There were no such rules. The 
arbitrator, or magistrate, after listening to the parties, 
would decide the dispute as he saw fit. 

In those early ages it appears to have been supposed 
that the king or magistrate had secret sources of knowledge 
and wisdom upon which he could draw, to enable him to 
render right judgments. Accordingly, we find Homer 
calling such judgments " Themistes," as if they were the 
promptings or inspirations of the goddess Themis. 

6. Judicial decisions gave rise to legal rules. — This 
practise of having disputes settled, not by physical combat 
between the disputants, but by state officials, resulted, as 
we should expect it would result, in the formulation of rules 
intended to prevent disputes. One of the earliest of these 
legal rules related to the manner of transferring title to 
property. Let us stop a moment to consider it, and espe- 
cially to note its harsh and technical character. 



6 ESSENTIALS OF BUSINESS LAW 

7. Conveyance with copper and scales. — Suppose an 
ancient Roman wished to buy a horse of his neighbor. 
How could he get a good title ? Not in the simple way in 
which a buyer would get title now. It was not enough for 
him and the seller to agree upon the terms of sale, nor even 
for him to pay the price and take the horse. He was 
required to go through a carefully prescribed and cumbrous 
ceremonial known as " mancipation." Five Roman citi- 
zens must be summoned as witnesses, and another citizen 
must attend with a pair of scales. The seller must then 
bring forward the horse, and the buyer must produce the 
rough copper pieces that served as money. • The man with 
the scales weighed the money, and the horse was then 
delivered to the buyer with certain prescribed words and 
gestures, while the money was handed to the seller. If 
any part of this ceremony was omitted, the buyer's title 
was defective and the seller could retake the horse. On 
the other hand, if all the forms were accurately observed, 
the transaction was absolutely binding on both parties. 
The buyer could not get back any of his money, however 
badly he had been cheated by the seller. 

Such a rule of law was, of course, a serious hindrance 
to trade; and as soon as commercial activity sprang up it 
had to be modified.' Some relief was obtained by confining 
it to certain forms of property — to land, slaves, horses, and 
oxen — as these were the things most valuable to the early 
Romans. Other kinds of property were allowed to be sold 
and transferred in accordance with usages that had grown 
up among business men. In this way, grain, fruit, clothing, 
jewelry — indeed, most of the things that formed the staples 
of trade — were exempted from the technical and cumber- 
some ceremonial of " mancipation," and the law made the 
title to them valid when they were delivered by the seller to 
the buyer pursuant to an agreement between them. Later, 
the advantages of this simpler rule led to an abolition of the 



INTRODUCTORY 7 

oldei one by legislation; and thereafter all kinds of prop- 
ert}' could be validly sold and transferred without any 
formal ceremony. 

8. The Roman law of contracts. — If we turn from the 
rules regulating the acquisition and transfer of property 
to those governing contracts, we shall find a similar advance 
from excessive technicality to simplicity; from rigid form- 
alism and ceremony to mutual assent. When we come to 
deal with the English law of contract, we shall see that, in 
the main, it is characterized by common sense and sound 
morality. Now and then we shall come a'cross survivals 
from an earlier age of technicality and formalism; but we 
shall find that on the whole the English law seeks to give 
effect to the honest and deliberate intentions of parties to 
business transactions. 

The primitive law of contract at Rome was of a different 
character. It recognized but one form — that known as the 
verbal contract — and this could be entered into only by the 
use of a particular word. One party must use the word 
spondes? (do you undertake?) and the other must use 
spondeo (I do undertake). If this word was not used, or if 
the conversation did not take the form of a question by the 
promisee and an immediate answer by the promisor, there 
was no contract, however clear might be the evidence that 
the parties had made a fair and deliberate agreement. 

Such a state of the law was tolerable only among a 
rude people whose business transactions were few. With 
the growth of trade at Eome, other forms of contract 
gained recognition, until finally by the Eoman law the fair 
and deliberate agreements of persons were enforced without 
respect to the form in which they were made. This devel- 
opment of the Eoman law of contract from the formal 
stipulation by a prescribed question and answer to the 
consensual agreements, in which the mutual assent of the 
parties was the vital element, took place in response to the 



8 ESSENTIALS OF BUSINESS LAW 

necessities of business and to the demands of the moral 
sense of the community. These have always and every- 
where exerted a powerful influence over the development 
of law. 

9. Law is common sense, but clothed in technical forms. 
— While modern law is far less technical and formal, and 
has far more of good sense and sound morality than the 
law of our early ancestors, it is not a body of rules that can 
be set forth without the use of technical terms. Although 
the highway of the law has improved with the progress of 
mankind from savagery to civilization, it is not yet so plain 
and straight that " the wayfaring men, though fools, shall 
not err therein.^' Its course, at times, is still tortuous and 
rugged. 

If the student is disposed to think that some parts of 
the law explained in the following pages are dry and hard 
to understand because of their technicality or subtlety, let 
him take to heart these words of Sir Henry Maine : " If 
I were asked to give a definition of law to persons quite 
ignorant of it — I mean, of course, a rough and popular, 
not a scientific definition or description — I should say law 
is common sense. Of course that is true only with very 
considerable reservations and abatements. It is not abso- 
lutely true even in England, where law has been cultivated 
for centuries by the flower of the national intellect — an in- 
tellect wedded above all things to common sense. But stillj 
with all abatements and reservations, the proposition that 
law is common sense is much truer than any one looking at 
the subject from outside can possibly conceive. What con- 
ceals this from the layman is the fact that law, being not 
only a science to be learned but an art to be applied, has, 
like all arts, to be thrown into technical forms. Techni- 
calities are absolutely indispensable to lawyers, just as the 
ideas of form, proportion, and color have to be thrown into 
a technical shape before they can give birth to painting and 



INTRODUCTORY 9 

sculpture. A lawyer can not do without technical rules, any 
more than a sculptor or a painter. Still, after all, the 
grand criterion of legal soundness is common sense; and if 
you are inclined to employ an argument, to draw an infer- 
ence, or to give an opinion that does not satisfy this test, 
which is out of harmony with experience and with the 
practical facts of life, I do not say reject it absolutely, but 
strongly suspect it, and be sure that the presumption is 
heavily against it." 



CHAPTER II 

THjii LAW MERCHANT AND THE COMMON LAW 

§ 1. The Law Merchant 

10. The sources of modern business law are twofold. — 

While most of the legal rules observed by business men in 
this country to-day are derived from the common law of 
England, some of them are traceable to a different source, 
having their origin in the law merchant. Three hundred 
years ago these two sets of rules, which have contributed to 
the formation of modern business law, were quite distinct 
and separate. Many of their principles were different, if 
not antagonistic. They were administered by different 
courts, whose judges were differently educated and whose 
methods of procedure were strikingly unlike. 

11. Their differences illustrated. — Perhaps the nature 
and extent of the differences between these two bodies of 
law may be made more intelligible by an illustration. 

Suppose, during the sixteenth century, A and B were 
partners in buying and selling wool. They attended a great 
fair at Winchester, England, made contracts for the pur- 
chase of wool, and A died. Suppose, at the same time, 
C and D were joint owners of a sheep-farm near Winches- 
ter, of a flock of sheep, and of a quantity of wool, recently 
sheared from the sheep, and that C died. The legal rights 
of B in the property owned by him and A at the latter's 
death would have been very different from those of D in 
the property owned by him and C at C's death, and those 
10 



THE LAW MERCHANT AND THE COMMON LAW 11 

rights would have been passed upon by wholly different 
courts. 

B's interests in the partnership property as it stood at 
A's death would have been determined by the law mer- 
chant as administered by the staple court — that is, by the 
merchants' court of Winchester; while D's interests in the 
farm, the sheep, and the wool jointly owned by him and C 
at the latter's death would' have been determined by the 
common law as administered by the regular judicial tri- 
bunals of the realm. 

12. Survivorship at common law. — It was a rule of 
the common law of England that upon the death of one 
of two joint owners the entire property belonged to the 
survivor. In other words, the share of the one dying 
passed to the one surviving, who became the sole and exclu- 
sive owner. Accordingly, upon C's death, D would become 
sole owner of the farm, the sheep, and the wool. 

13. No survivorship between partners. — The law mer- 
chant, however, did not recognize this right of survivorship 
between partners. After the death of A, therefore, B's 
interest in the partnership property would be neither 
greater nor smaller than before. He would have the right, 
indeed, to settle the affairs of the firm ; but, as soon as they 
were settled, he would be bound to pay over to A's personal 
representatives (that is, his executors, if he left a will, or 
his administrators, if he died without a will) his share of 
the partnership property. 

14. Effect of death on outstanding contracts. — Again, 
in our supposed case, A and B as partners had entered into 
contracts for the purchase of wool. Under the law mer- 
chant, the death of A would not relieve his estate from 
liability on such contracts. If B received the wool and 
refused to pay for it, the seller would not be limited to a 
claim against B; he would have a legal right to call upon 
A's executors or administrators for the price of the wool. 



12 ESSENTIALS OF BUSINESS LAW 

On the other hand, had C and D bought hay on 
credit for their sheep, the common law would have cast 
the whole burden of the debt on D at C's death. Neither 
the creditor, who had sold the hay, nor D, even after 
paying the entire price, conld call on C's estate for a 
farthing. 

15. Merchants' courts. — N'ot only did the rules of the 
law merchant differ in many important respects from those 
of the common law, as shown in the foregoing illustrations, 
but the courts which administered this law formed a judicial 
system w^hich was entirely distinct from that of the courts of 
common law and of equity, whose jurisdiction extended 
throughout the kingdom. If we may trust the preamble 
of a statute of Edward III, enacted in 1353, merchants' 
courts in England were intended '' to give courage to mer- 
chant strangers to come with their wares and merchandise 
into the realm.'' ^ 

Evidently these traders were unwilling to come if they 
were to be subjected to the rules of the English common law. 
and compelled to adjust their disputes in the common-law 
courts, already notorious for their technical and dilatory 
procedure. They would come only upon condition that spe- 
cial courts were organized, which should sit in connection 
with the fairs or markets where these merchants transacted 
business, and should do speedy justice " according to the 



1 The Statute of tU Staple, 27 Ed. Ill, c. 2. This is a. very im- 
portant and interesting act of Parliament — one which the student 
will do well to read if he has access to the English Statutes at Large. 
It named the towns in which the staple, i. e. , the oMtliorized, market 
of wools, leather, woolens, and lead should be held ; it regulated the 
conduct of such markets, and provided for merchants' courts in con- 
nection with them. The staple or market towns were Newcastle-upon- 
Tine, York, Lincoln, Norwich, Westminster, Canterbury, Chichester, 
Winchester, Bristol, Kaermerdyn,' Devylen, Waterford, Cork, and 
Drogheda. 



THE LAW MERCHANT AND THE COMMON LAW 13 

law of the staple,'' or of " the merchant, and not of the 
common law of the land, nor of the usages of cities, bor- 
oughs, or towns " where the staple, or market, or fair was 
held. 

16. Judges and juries of merchants' courts. — By the 
Statute of the Staple it was provided that the common-law 
judges should not have jurisdiction over the business trans- 
actions of these merchants, but '' that the mayors and con- 
stables of the staple shall have jurisdiction and cognizance 
within the towns where the staples shall be, of people, and 
of all manner of things touching the staple." 

It was provided, further, that in every staple town " a 
mayor, good, lawful, and sufficient, shall be made and estab- 
lished, having knowledge of the law merchant, to govern 
the staple and do right to every man after the laws afore- 
said, without favor, sparing, or grief-doing to any." Also 
that there shall be two constables in each staple or market 
town, " to do that pertaineth to their office as in other 
staples is accustomed." These mayors and constables were 
to be "chosen by the commonalty (i.e., the whole body) 
of the merchants of the said places, as well of strangers as 
of denizens." If a jury was to be employed in any case, it 
was to consist of merchants only. Merchants " coming to 
the said staples because of merchandise " were to be sworn 
to submit their controversies to the mayor and constables 
and to " maintain as much as in them is the staple and the 
laws and usages of the same." 

17. These courts called pepoudrous. — Many, perhaps 
most, of the merchants doing business in these market 
towns were non-residents. It was very important to them, 
therefore, that lawsuits in which they became engaged 
should be disposed of quickly. Accordingly we find the 
statute declaring that " speedy right be done to merchants 
from day to day and from hour to hour, according to the 
laws used in such staples before this time holden elsewhere 

3 



14 ESSENTIALS OF BUSIKESS LAW 

at all times, so that the merchants be not by malice de- 
layed for default of speedy remedy." Because of the rapid- 
ity with which these merchants^ courts despatched business, 
they were styled courts pepoudrou^. Lord Coke, writing 
two centuries and a half after the enactment of the statute 
of the staple, tells us that a court pepoudrous '' is incident 
to every fair or market, because that for contracts and in- 
juries done concerning the fair or market there shall be as 
speedy justice done for the advance of trade and traffic as 
the dust can fall from the feet, the proceeding there being 
from hour to hour." In other words, these merchants' 
courts were always open, always ready to redress business 
grievances, and to redress them quickly ; so quickly, indeed, 
that justice might be said to be administered while the dust 
fell from the feet of the litigants. 

18. Modern ignorance of the ancient law merchant. — 
It is apparent that the statute of the staple secured to mer- 
chants prompt adjustment of disputes in accordance with 
the rules of the law merchant. We have to confess, how- 
ever, that modern knowledge of those rules is very vague. 
No complete and formal record was kept of the judicial 
proceedings of the merchants', or staple, or pepoudrous 
courts. No formal reports of their decisions were written 
out or published. No trained and accurate lawyers took 
notes of these decisions, or reduced them to the form of a 
systematic digest; nor, apparently, did any writer think of 
setting forth this body of law in a scientific manner. Con- 
sequently we find learned and indefatigable legal students, 
like the late Lord Blackburn, declaring that the history of 
the law merchant in England is most obscure. 

The suggestion has been made by Pollock and Maitland, ' 
in their history of English law, that if we could recover the 
ancient law merchant, we would find it " chiefly to consist 
of what would now be called rules of evidence, rules about 
the proof to be given of sales and other contracts, rules as 



THE LAW MERCHANT AND THE COMMON LAW 15 

to the legal value to be given to the tally and the God's- 
penny/' ^ 

19. Fragments of the law merchant in sea codes. — It is 

true that some of the rules of this legal system have come 
down to us in various codes of sea laws, such as the laws 
of Oleron and Wisby, but these were limited almost ex- 
clusively to maritime transactions, to the navigation of 
ships, and to contracts relating to shipping interests. It is 
also true that treatises on the law merchant were published 
as early as the fourteenth century; but these were informal 
and unsystematic collections of the usages and customs of 
merchants — laymen's desultory discussions of their prac- 
tises in business matters, rather than lawyers' statements 
of legal rules or judicial decisions. Certainly no lawyer of 
to-day would undertake the task of formulating from these 
books anything like a code of the law merchant. 

20. The ancient law merchant was international. — A 
comparison of these books shows, however, that the usages 
and customs of merchants were the same throughout Eu- 
rope. Mercantile contracts were entered into in the same 
way in Italy as in England; in Germany as in France and 
Spain. They were proved by the same evidence, and dis- 
putes arising from them were settled by courts similarly con- 
stituted — that is, by courts of merchants whose judges were 
selected because of their knowledge of the law merchant. 
Accordingly this body of rules and usages was often spoken 
of as " a branch of the law of nations," or as the " law of 
nature," or as the " law universal of the world." 

^ A primitive method of keeping accounts was by cutting notches 
in two pieces of wood placed together, one piece or tally being kept 
by the creditor, while' the other was kept by the debtor. The God's- 
penny was a penny given by one party to the other to bind a contract. 
According to Fleta, the law merchant compelled a party who broke a 
contract which had been bound by the God's-penny to forfeit five 
shillings for every farthing, or a pound for a penny. 



16 ESSENTIALS OF BUSINESS LAW 

21. DifS-Culty in applying this law of nature. — The fact 
that this was a " natural '" s}- stem of law did not insure an 
easy solution of every dispute. 

Of course, when a common-law court, like that of the 
King's Bench under Edward II, is called on to apply a rule 
of this " law of nature '' failure is to be expected. Its mem- 
bers, trained as they have been in an artificial, a technical, 
a perverted system of law, will be unable to say what is 
according to nature and what is not; and they will be 
forced to summon merchants — twelve of them selected 
from four cities are none too many — to testify what the 
rule in question is. But not infrequently even a merchants' 
court is sorely puzzled to determine just what this " law of 
nature " requires in a particular controversy, and the case 
" must be respited until it shall be more thoroughly dis- 
cussed by the merchants of the various commonalties and 
others convoked in full court." 

Still, even in such a case, a decision would be reached 
much more quickly in a merchants' court than in a court 
of common law or of chancery. During a fair, or while 
ships were lying in port, the merchants' court was always 
open for " plaints and pleas " of those doing business at 
the fair or interested in the ships temporarily in port. 
Summary proceedings, quick settlement of disputes rather 
than ideal justice, was the motto of these courts. This de- 
mand of the mercantile classes for the speedy adjustment 
of controversies which made merchants' courts so popular 
centuries ago, has never ceased. In recent years it has led 
the English courts of common law to provide a special tri- 
bunal for the trial of commercial cases, in order that these 
might be brought to trial and decided promptly. 

22. Decay of merchants' courts. — During the seven- 
teenth centur}^, the merchants' courts and the various simi- 
lar courts which administered the law merchant in England 
died out and disappeared. A part of this law merchant, 



THE LAW MERCHANT AND THE COMMON LAW 17 

especially those rules which had been embodied in the sea 
codes to which we have referred, continued to be adminis- 
tered by the English Court of Admiralty ; but this tribunal, 
too, under the vigorous assaults of the common-law bench 
and bar, led by Lord Coke, was forced to yield much of its 
jurisdiction and dignity to the common-law courts. 

23. Merchants' courts in America. — While these courts 
were dying out in England, they gained a new lease of life 
in some of the American colonies. For example, New York 
passed an act in 1692 " for the Setling of ff airs' and Mar- 
quets' in each respective citty and County throughout the 
Province," which authorized the governor or ruler of each 
fair " to have and to hold a court of Pypowder together 
with liberties and free customs to such appertaining/' and 
to hear " from day to day and hour to hour all plaints and 
pleas of a court of Pypowder^ together with summons, at- 
tachments, arrests, issues, fines, redemptions, and commod- 
ities and other rights whatsoever to the same courts of 
Pypowder anyway appertaining." As late as 1773 the 
above provisions were extended to new counties and to addi- 
tional fairs or markets authorized in the older parts of the 
colony. 

That these courts were held by magistrates who were 
learned in the ancient law merchant is not probable. The 
governors and rulers of the colonial pypowder courts dis- 
pensed justice promptly, without doubt, but they dispensed 
it in accordance with their sense of what was fair between 
man and man, not in accordance with any established sys- 
tem of law. We may well believe that their legal training 
and their judicial proceedings were not those of the courts 
pepoudrous described by Lord Coke; but that they were 
far more like those of an early Quaker governor of New 
Jersey, Thomas Olive, whose seat of justice was a stump 
in his meadow and who was innocent of any knowledge of 
technical law. 



18 ESSENTIALS OF BUSINESS LAW 

24. The law merchant in common-law courts. Second 
stage in its development.— AVitli the decay of merchants' 
courts and kindred tribunals, the law merchant did not 
wholly disappear, although it ceased to exist as a well-de- 
fined body of legal rules distinct from those of the common 
law. Some of its rules found their way into the common- 
law courts, and were spoken of frequently by common-law 
judges as the law merchant, but they were not treated as 
a part of the general law of the land; rather were they 
looked upon as the trade customs of a limited class — the 
merchants — and as binding on that class only. Even a 
merchant could not avail himself of one of these customs 
unless he pleaded and proved its existence and persuaded 
the common-law judge that it was a proper one to enforce. 
For example, it appears to have been necessary, until near 
the close of the seventeenth century, for the indorsee of a 
bill of exchange,^ in order to recover in a suit against an 
acceptor, to state and prove that the acceptor was a mer- 
chant. 

Most of the judges looked upon these mercantile usages 
with favor, and were disposed to give effect to them when- 
ever they could. Occasionally, however, a judge arose who 
held a different attitude toward them. The most notable 
of these was Lord Holt, chief justice of the King's Bench 
from 1689 to 1709. During the latter part of the seven- 
teenth century promissory notes ^ were introduced into 
England and passed as freely among merchants and bank- 
ers as did bills of exchange. When, however, holders of 
these notes undertook to sue upon them, as they had been 
accustomed to sue upon bills of exchange, alleging that they 
were negotiable by the usage and custom of merchants, 



^ For the definition of a bill of exchans:?, and for an account of 
the rights and liabilities of the parties to a bill, see Chap. YIII, infra. 
2 S^ee Chap. VIII, infra. 



THE LAW MERCHANT AND THE COMMON LAW 19 

Lord Holt refused to recognize any such mercantile usage. 
In the language of the reporter of the leading case on this 
subject, the chief justice " was with all his strength against 
this action, and said that this note could not be a bill of 
exchange ; that the maintaining of these actions upon such 
notes were innovations upon the rules of the common law, 
which innovations were invented in Lombard Street, and 
which attempted in these matters of bills of exchange to 
give laws to Westminster Hall ; that the continuing to de- 
clare upon these notes upon the custom of merchants pro- 
ceeded from obstinacy and opinionativeness, since he had 
always expressed his opinion against them." 

25. Parliament backs the merchants. — But the mercan- 
tile classes, represented by the bankers and merchants of 
Lombard Street, were not to be balked of their purpose 
even by a great chief justice of the King's Bench. They 
continued to use and to sue upon these notes as negotiable 
instruments; and when a deadlock seemed imminent be- 
tween the obstinate and opinionative merchants and bank- 
ers on the one hand, and the equally opinionative and ob- 
stinate chief justice on the other. Parliament intervened, 
and by the statute of 3 and 4 Anne, chapter 9, in 1704, set- 
tled the controversy in favor of Lombard Street. 

Chief -Justice Cockburn, in 1875, reviewing this con- 
flict, did not hesitate to call Lord Holt's view of this 
matter a narrow-minded one, and to declare that his de- 
cisions, adverse to the mercantile usage in question, were 
not acceptable to the legal profession nor to the business 
classes. 

26. Third stage in the development of the law merchant. 
— This began under the chief justiceship of Lord Mans- 
field, which extended from 1756 to 1788. During the pre- 
ceding century and a half, as was stated above, merchants' 
courts had died out, and the law merchant had taken on a 
new phase. When a case involving mercantile usages 



20 ESSENTIALS OF BUSINESS LAW 

came before a common-law courts the existence and nature 
of those usages were left to a jury together with all the 
facts of the case. Xo attempt was made by the court to 
discover and expound the legal principle underlying particu- 
lar usages, and but little progress was n^ade in building up 
a system of mercantile law to take the place of that which 
had been administered by the merchants' courts. 

With this condition of the law merchant in England, 
Lord Manstield was dissatisfied, and he devoted his great 
abilities to its improvement. His thorough knowledge of 
the Eoman law, especially in its modified form in Scotland, 
saved him from the narrow partizanship for the common 
law, which, as we have seen, distinguished Lord Holt. He 
was not averse to innovations upon the common law, nor 
did he resent the attempts of Lombard Street bankers and 
merchants to make law for themselves and for those deal- 
ing with them. On the other hand, he delighted in cooper- 
ating with Lombard Street — which is but another name 
for the business men of London — in developing a body of 
legal rules which should be free from many of the techni- 
calities of the common law, and whose principles should be 
so broad and sound and just as to commend themselves to 
all courts in all countries. Accordingly, when a case in- 
volving the usages of merchants came before him, he sought 
to consider not only what those usages were, but the legal 
principle underlying them. 

27. Lord Mansfield's methods. — We are told by Lord 
Campbell, in his life of Lord Mansfield, that the latter 
" reared a body of special jurymen at Guildhall, who were 
generally returned (that is, were summoned and sat as 
jurors) on all commercial cases to be tried there. He 
was on terms of familiar intercourse with them, not only 
conversing freely with them in court, but inviting them 
to dine with him. From them he learned the usages of 
trade, and in return he took great pains in explaining to 



THE LAW MERCHANT AND THE COMMON LAW 21 

them the principles of jurisprudence by which they were 
to be guided/^ 

The diverse sources of these principles are disclosed in 
many of his important opinions. Mr. Scrutton has cited 
as an example Lord Mansfield's " great judgment in Luke 
vs. Lyde/ which raised the question of the freight due for 
goods lost at sea. He cited the Roman Pandects, the Con- 
solato del Mare, the laws of Wisby and Oleron, two Eng- 
lish and two foreign mercantile writers, and the French 
Ordonnances, and deduced from them the principle which 
has since been part of the law of England." So rapid was 
the development of the modern law merchant, during Lord 
Mansfield's chief justiceship, that one of his younger asso- 
ciates and disciples, Mr. Justice Buller, did not hesitate to 
call him " the founder of the commercial law of England." 
That he is entitled to this name does not admit of a doubt. 
It was he who won for the law merchant a recognized place 
in English jurisprudence, 

28. Fourth stage in the development of the law mer- 
chant. — Still this branch of the law has not only grown 
since Lord Mansfield's time, but its relation to other 
branches of the law has nndergone a change. That great 
jurist was accustomed to declare that " mercantile law is 
not the law of a particular country, but the law of all na- 
tions." His conception of it was as a body of legal rules 
to be applied and enforced by English courts, but yet dis- 
tinct and separate from the common law of England. Dur- 
ing the century and more since his death the tendency has 
been toward an amalgamation of the rules of the law mer- 
chant with those of the common law. The two are no 



^ Decided in 1759, and reported in 2 Burrows, 883. The decisioij 
was that in case of a loss at sea, freight must be paid only in propor- 
tion to the goods saved, and the part of the voyage which was per 
formed. 



22 ESSENTIALS OF BUSINESS LAW 

longer distinct systems. Each has been modified by the 
other, and lost its separate identity. Together they con- 
stitute the unwritten law of English-speaking countries. 

29. Summary: Four meanings of "law merchant." — 
From the foregoing sketch it appears that the term " law 
merchant '' bears at least four distinct significations in 
English jurisprudence. (1) Originally it meant a body of 
rules relating to mercantile contracts and transactions, 
founded upon the usages of merchants, known particularly 
to merchants, and administered by courts of merchants. 
(2) After these special courts died out the term was ap- 
plied to those mercantile customs which the regular judicial 
tribunals were willing to enforce in cases growing out of 
commercial disputes. These customs were not law, in the 
proper sense of that term, but were elements in mercantile 
transactions to be taken into account in each case by the 
jury and the court. (3) The third signification originated 
with Lord Mansfield, and was employed at times by Mr. 
Justice Story. In this sense, the law merchant meant a 
body of legal rules, free from the peculiarities and techni- 
calities of the municipal law of any one country, so reason- 
able in their nature and so broad in their scope as to be law 
everywhere. (4) Still a fourth and less definite significa- 
tion attaches to the term at present. It is not employed to 
mark off a distinct body of legal rules from all others ; nor 
does it distinguish one set of business usages from all 
others; nor does it mean that the rules falling under this 
title are accepted everywhere as law ; but it is used to desig- 
nate in a loose and popular, rather than in a scientific man- 
ner, those branches of law which have been modified to a 
considerable extent by the usages of merchants, such as the 
law of insurance, of partnership, o'f negotiable paper.^ 

^In this sense it appears in the Uniform State Laws, e.g., "In 
any case not provided for in this article, the rules of law and 
equity, including the law merchant . . . shall govern." 



THE LAW MERCHANT AND THE COMMON LAW 23 

§ 2. The Common Law 

30. Various significations of the term. — In onr account 
of the law merchant we have referred frequently to the 
common law. Let us consider now the different senses in 
which the term is employed, and trace very briefly the his- 
tory of this system of legal. rules. 

" In its largest sense/' says Sir Frederick Pollock, " it 
means the whole body of legal principle and usage which 
is common to all parts of England, and now to all jurisdic- 
tions whose law is of English origin.^' When used in this 
sense, it is contrasted, the reader will observe, with the cus- 
toms and usages of a particular locality, or with the usages 
of particular classes, such rs merchants, during the 
period when they were enforced in special courts. Such cus- 
toms and usages, it must be remembered, were rules of con- 
duct for the inhabitants of a limited region, or for persons 
engaged in definite lines of business. They were not bind- 
ing on all classes throughout the kingdom; they were not 
common law. 

In this largest sense the term serves also to contrast the 
English system of law with other systems, especially with 
that of Eome. For example, we speak of the laws of Lou- 
isiana as founded on the civil or Eoman law, while that of 
every other State of our Union has its origin in the common 
law of England. 

31. Common law is unwritten. — The term is used in 
another sense, to designate that part of English jurispru- 
dence which has not been embodied in statutes. It then 
means the unwritten law, or the law found in the decisions 
of the courts. The reader may ask, why should that part of 
the law which is found in judicial decisions be called " un- 
written," when those decisions have been written out and 
printed? It must be confessed that the word "unwritten " 
is not a very happy one to use in this connection, but it has 



24 ESSENTIALS OF BUSINESS LAW 

been used so long that it can not now be discarded. Wlien 
we speak of the law of judicial decisions as unwritten, we 
mean that its rules have not been " prescribed in a specific 
form of words by the legislative authority/' while the rules 
in statutes have been. 

Many rules of the common law, using the term in this 
sense, have ceased to exist as such, having been formulated 
in acts of Parliament in England, or in acts of Congress 
for the United States as a nation, or in acts of a State 
Legislature for a particular commonwealth. In this way 
they have been transformed from unwritten to written law, 
or, in other words, from common to statutory law. In some 
of our States, as in California, substantially all legal rules 
and principles have been codified — that is, have been stated 
in statutory form. The common law, therefore, in the sec- 
ond sense of the term, does not exist in that State, while 
in the first sense it still continues. Its form is written or 
statutory ; but its substance is that of the common-law, not 
of the civil-law system. 

32. The second signification modified in many States. — 
In other States of our Union, the term, in its second sense, 
has undergone a different modification. When the colonies 
separated from England and became independent States 
they were free, of course, to continue the English system of 
law, or to reject it, or to modify it. Some of them formally 
declared that so much of the common law and of the statute 
law of England, as well as of the statute law of the particu- 
lar colony, as did then form the legal system of the colony, 
or was suited to the needs of its people, should thereafter 
constitute the law of that State. 

In this way the term common law has been subjected 
to a peculiar modification in those States. It has come to 
mean those legal rules and principles which were binding 
on the people of a particular State, at the openin-T of the 
American Revolution, as distinguished from those which 



THE LAW MERCHANT AND THE COMMON LAW 25 

have been added by the legislation of the State, since its 
separation from Great Britain. 

33. Common law as the law of certain courts. — A third 
signification of the term serves to contrast the law, as it 
was administered by one class of judicial tribunals, with the 
law as it was administered by other classes. The body of 
legal principle and usage recognized and enforced by the 
courts of the King's Bench, of the Common Pleas, and of 
the Exchequer was the common law in this third sense of 
the term. Those courts were the common-law tribunals, in 
contrast with the equity and the Admiralty courts; and 
their system of pleading and procedure was styled common- 
law pleading and procedure. 

It is the common law, in this sense of the term, against 
which the charge of technicality, of narrowness, of arbitrary 
and rigid rulings is most frequently and most persuasively 
brought. It was this body of legal doctrine and this form 
of legal procedure, which the merchants most stoutly ob- 
jected to, and sought exemption from in their special mer- 
chants' courts. It was to give redress to suitors, who were 
without remedy in these common-law courts, that the Court 
of Chancery ^ was instituted ; and it was to supplement the 
common law, to relieve from its technicalities, and to cure 
its defects that the system of equity was worked out by the 
chancellor and his judicial associates. 

34. Merger of common-law and equity courts. — Al- 
though the term is still used in this third signification, the 

1 This court deri^'-ed its name from the Lord Chancellor, who was 
its chief officer. Its establishment came about in this way: Prior to 
the reign of Edward III, a person who thought himself wronged by 
the ordinary courts of law, or to whom these courts could not give 
redress, appealed directly to the king for relief. As these applica- 
tions increased, the king began to turn them over to the chancellor 
for decision. In the twenty-second year of the reign of Edward III. 
a general order was made referring all petitions of this sort to the 
chancellor, and thus setting up a court of chancery. 



26 ESSENTIALS OP BUSINESS LAW 

common law is no longer separated from equity by a great 
gulf of principle and procedure, as it was three centuries 
ago. In England, the courts of common law and of equity 
have been consolidated into one Supreme Court of Judi- 
cature, with a single system of procedure; and a similar 
change had been made many years earlier in most of our 
States. 

Even before this consolidation of courts, with its attend- 
ant merger of the two systems of rules, the common law 
had absorbed many equitable principles and freed itself 
from not a few of its old technicalities. 

35. Origin of the common law. — Using the term in the 
first and second significations above described, the common 
law had its. origin in the usages of the English people at 
large, as the law merchant had its rise in the usages of a 
class. The development of the two bodies of legal rules, 
however, followed widely different lines. We have called 
attention already to the fact that the merchants' courts 
despatched their business rapidly. The pleadings — that is, 
the statements of the plaintiif's claim and of the defend- 
ant's reply thereto — were informal ; the proceedings in court 
were pushed to a speedy conclusion; the judges did not in- 
dulge in the preparation and presentation of carefully con- 
sidered and elaborate opinions, and the cases were not 
reported. As a result, the decisions did not become fixed 
precedents binding upon the judges in future cases. On the 
contrar}^, the law merchant was free to conform to the 
changing needs of business, and its rules were handed down 
by tradition rather than in court records or in legislative 
enactments. 

36. Common-law courts were deliberate and spectacular. 
— In striking contrast to the courts pepoudrous, where as 
speedy justice was to be done as dust could fall from the 
feet of impatient suitors, were the Superior Courts of Eng- 
land, in which the common law was developed. Thev were 



THE LAW MERCHANT AND THE COMMON LAW 27 

not in haste. They did not sit from day to day and from 
hour to hour, in their anxiety to dispose of litigation 
promptly that the litigants might go about their other 
business. They sat only at stated periods, and then only 
from eight to eleven in the morning. " For in the after- 
noons," writes Sir John Fortescue, in the fifteenth century, 
" these courts are not holden. But the suitors then resort 
to the perusing of their writings, and elsewhere consulting 
with the serjeants-at-law and other their counselors." 

If the plaintiff's lawyer had made a mistake in the form 
of action which he had brought, or in his manner of stating 
the cause of action, or in the formal conduct of the litiga- 
tion, the plaintiff, after waiting months for a hearing, might 
be turned out of court upon a mere technicality, before the 
merits of his case received any consideration. Even when 
no technical mistake had been made by his lawyer, he was 
obliged to await the slow and stately processes of the court. 
A recent writer, commenting upon this phase of common- 
law procedure, declares : " In the eyes of most laymen, the 
conduct of civil disputes is by no means carried on in a 
business-like way. There is in the processes of a lawsuit 
too much the air of a tournament in the setting of the 
scene; the knight combatants enter the lists on behalf of 
their clients with more zeal for the display of forensic skill 
in battle than is compatible with a prompt conclusion ; their 
more exalted colleagues on the bench seem mainly bent on 
letting each side have full as well as fair play; while the 
spectators, legal and lay, crowd the court in order to enjoy 
the spectacle." 

And yet this very deliberation of a common-law court, 
this stateliness and ceremonial, this spectacular element in 
its procedure, have contributed not a little to its success. 
They have fostered a full and fair discussion by trained 
lawyers of the principles involved in each litigated case. 
They have established the practise of oral examination and 



28 ESSENTIALS OF BUSINESS LAW 

cross-examination of witnesses. They have snbjected the 
judges to the criticism of the press and of the public^ and 
have made them careful in their consideration and decision 
of cases. 

37. Recorded precedents. — Moreover, at an early day, 
the practise of officially reporting the decisions of these 
courts was established. These reports, containing as they 
do brief statements of the questions in dispute between the 
parties to each case, with outlines of the legal arguments on 
behalf of each side, and with the reasons assigned by the 
judges for their decision, have exercised a great influence 
over the development of the common law. When a matter 
of dispute is brought before a court for determination, the 
first inquiry is, has a like case been presented and decided 
previously? If this has happened the task of the court is 
an easy one ordinarily. Stare decisis et non quieta movere 
— " To stand by decisions and not to disturb what has been 
settled " — is its motto. Accordingly this case is disposed 
of as the like case was disposed of before it. A precedent 
has been established and must be followed by the judges. 
A rule of law has been fixed, to which parties to like trans- 
actions must conform, and upon which lawyers can safely 
rely in advising their clients hereafter. 

It is true that this strict adherence to precedent does 
not always result in doing abstract justice in a particular 
case; but it is the theory of the common law that it is bet- 
ter for the community at large that legal rules be definite, 
and known and enforced, than that they remain uncertain 
while halting human wisdom strives to bring them to per- 
fection. 

38. Unfortunate precedents. — At times, it must be con- 
fessed, this common-law consecration of recorded decisions 
— of judicial precedents — has resulted in grievous hardship 
to individual suitors. It may be that the original decision, 
when made, was in accord with business usages, or business 



THE LAW MERCHANT AND THE COMMON LAW 20 

needs, or the ideal of justice then prevailing in the comni"ii»- 
nity. Butj in the meantime, one or all of these have under- 
gone a change, while the rule established by the precedent 
has not altered. It is definite, intelligible, rigid. Even 
though it produces injustice rather than justice, it must be 
enforced by the courts until it is abolished or modified. 

The attitude of common-law courts when called upon to 
enforce such a precedent is that taken recently by a learned 
judge of the Illinois Supreme Court. The question for de- 
cision was whether a passenger who, having received a 
wrong transfer slip from a street-car conductor, and, having 
refused to pay another fare, was put off the car, could re- 
cover damages from the street-car company for the forcible 
expulsion. Said the learned judge : " I concur in the conclu- 
sion that the plaintiff can not recover these damages. He 
is entitled only to the repayment of his fare. I concur be- 
cause the precedents established by this court prevent a 
recovery by him. The law is a science of precedents. I bow 
to the law as announced by the authorities, but am not 
obliged to surrender my right of private judgment; and in 
my opinion, the doctrine referred to is unsound and an 
abhorrent subordination of the rights and convenience of 
passengers to the interests of railroad companies." Simi- 
lar language was used by Chief-Justice Cockburn of a rule 
of equity which he felt bound to follow. He said : " But 
though this seems consistent neither with justice nor com- 
mon sense, it has been so long firmly established that it 
can only be altered by the legislature." 

39. Getting rid of inequitable precedents. — How can the 
abolition or modification of a legal rule based on unfor- 
tunate precedents be accomplished? In one of three ways, 
the first of which is by intervention of equity. The right 
of the English chancellor thus to intervene for the relief of 
suitors who were victims of the harsh rules and the technical 
procedure of the common law was not established without 
4 



^0 ESSENTIALS OP BUSINESS LAW 

a long and hard struggle, in the final stages of which Lord 
Coke was the champion of the common law and Lord Bacon 
was the champion of equity. Lord Bacon's view prevailed, 
and thereafter it was the accepted doctrine that " it is the 
office of equity to mitigate the rigor of the common law, 
to supply its deficiencies, to relieve from its technical rules, 
and to decide controversies according to equity and good 
conscience/' 

40. Legislative correction of precedents. — The second 
method of obtaining relief is by legislative enactment. This 
was the method pursued by the bankers and merchants of 
Lombard Street, as we have seen, when Chief-Justice Holt's 
decisions were likely to form precedents, opposed to mercan- 
tile usages and harmful to the interests of trade. 

41. Distinguishing and limiting precedents. — Still a 
third method is that resorted to by the common-law courts 
themselves. When the judges become convinced that an 
established precedent is working injustice, they may over- 
rule the mischievous decision, or they may distinguish the 
case which is before them from the one in which the mis- 
chievous decision was rendered. As a rule, they pursue the 
latter course. This saves them from openly violating their 
motto of stare decisis — " standing by the decisions " — and 
enables them to feel their way cautiously toward the formu- 
lation of a new and better rule on the subject. 

42. Principles dedncible from recorded cases. — But sup- 
pose the matter in dispute has not been previously decided — 
that there is no judicial precedent which exactly covers the 
case now before the court. Even here the reported cases 
are not without value. They will be carefully examined by 
the lawyers for the contending parties, as well as by the 
judges, for statements of general principles or of maxims, 
from which the true rule applicable to the pending case 
may be deduced. It is in such a case that the great advo- 
cate or the great judge finds inspiration to lofty efforts, and 



THE LAW MERCHANT AND THE COMMON LAW 31 

a field for the display of all his powers. It is then possible 
for a Mansfield to make the impression described by Mr. 
Justice Buller in his famous eulogy of that remarkable 
chief justice : " We all know the great study has been to 
find some certain general principle^, not only to rule the par- 
ticular case under consideration, but to serve as a guide to 
the future. Most of us have heard those principles stated, 
reasoned upon, enlarged, and explained till we have been 
lost in admiration at the strength and stretch of the human 
understanding." 

43. Flexibility of the common law. — The common law 
is imperfect necessarily, for it is a product of the human 
mind and will. It is open to criticism. If the student is 
curious to know what criticism, fair and unfair, may be 
visited upon it, he should read Jeremy Bentham's works. 
On the other hand the common law has always had its ar- 
dent, if not blind admirers. During the struggle between 
the courts of common law and the chancellors, to which 
reference has been made. Lord Coke and his followers did 
not hesitate to declare that the " chancellors interfered 
through ignorance of the goodness of the common law," 
and that " the law of the realm is a sufficient rule to order 
you and your conscience what ye shall do in everything and 
what ye shall not do." 

If the common law consisted solely of a code of hard 
and fast rules laid down in the decisions of reported cases, ^ 
and of the technical procedure which formerly prevailed in 
its courts, it would deserve harsh criticism. But it does 
not consist of those alone. Indeed, they are rather the 
external trappings of the system, while its spirit is found 
in broad legal principles which the courts apply to the facts 
of each particular case. As a body of principles it is con- 
stantly undergoing change in order to adapt itself to the 
new needs of the people. It is flexible and expanding, not 
rigid and stationary. Viewed as a body of principles and 



32 ESSENTIALS OF BUSIKESS LAW 

a system of reasoning, rather than as a code of rules and 
system of procedure, the common law is not unworthy of the 
encomium of Sir Matthew Hale : " It is not the product of 
the wisdom of some one man or society of men in any one 
age, but of the wisdom, counsel, experience, and observa- 
tion of many ages of wise and observing men/' With all 
its faults it has served and continues to serve well the 
English-speaking peoples of the world, for " it is the prod- 
uct and measure of their character and temper; the reflex 
of their life and character/' 

43 (a). Specific rules of oommon law.^These, as inti- 
mated in preceding paragraphs, may be changed and often 
are changed by legislation. Statutes of this sort have been 
attacked as violative of constitutional provisions, which pro- 
hibit legislatures from depriving a person of property with- 
out due process of law. But the courts have held that ^^no 
person has a vested interest in any rule of law entitling him 
to insist that it shall remain unchanged for his benefit." ^ 
"Eights of property which have been created by the comm^on 
law cannot be taken away without due process; but the law 
itself as a rule of conduct may be changed at the will of 
the legislature, unless prevented by constitutional limita- 
tions. Indeed, the great office of statutes is to remedy 
defects of the common law and to adapt it to the changes 
of time and circumstances/' ^ 

^Kew York Central Ey. Co. v. Wliite, 243 U. S. ISS, 198. The 
statute modified tlie common law rule as to liability of employers 
to employees. X. Y. Laws 1914, Ch. 41, Workmen's Compensation 
Act. 

'Munn V. Illinois, 94 U. S. 113, 134. The statute modified the 
common law rules as to charges by warehousemen. Ill- Laws 1871, 
approved Apl. 25. 



CHAPTEE III 

CONTRACTS 

§ 1. How A Contract is Made 

44. A knowledge of the principles governing contracts 
is important. — Before taking up the various branches of 
business law, it is important that the student should gain 
a clear idea of the general principles of contracts ; for with- 
out a knowledge of these he will be unable to follow intel- 
ligently the discussion of agency, of bailments, or of the 
other topics. 

45. Definition and essentials of contract. — As a legal 
term, contract means an agreement enforceable by law. 
While there may be an agreement without a contract, there 
can not be a contract without an agreement. The very first 
essential of a contract is the meeting of minds of two or 
more persons — their mutual assent to a definite proposi- 
tion — an agreement between them. But, though the par- 
ties may have agreed, the law may decline to enforce that 
agreement. If it does there is no obligation upon the par- 
ties — no bond holding them together. Either party may 
break his agreement without subjecting himself to any legal 
liability. 

Our law declines to enforce an agreement unless: (1) 
It is made by parties who have legal capacity to contract; 
(2) Unless a legal consideration has been given for the 
promise contained in the agreement; (3) Unless there is a 
lawful subject-matter for the agreement. These essentials 

33 



34 ESSENTIALS OF BUSINESS LAW 

of a contract we shall discuss with appropriate fulness 
presently; but before doing so let us briefly consider some 
transactions that are often spoken of as contracts, but which 
are not contracts at all. 

46. Obligations which are not true contracts. — It must 
be confessed that even eminent judges and law-writers have 
been very careless in their use of the term contract. For 
example, they often speak of a judgment for money as a 
contract — " a contract of record." Surely here is no prom- 
ise to pay on the part of the judgment debtor — that is, the 
person who was the losing party in the lawsuit and against 
whom the court ordered the judgment to be entered. He 
may feel and often does feel that the debt is one he ought 
not to pay. So far from ever actually promising to pay the 
judgment, he has done everything in his power to repu- 
diate any liability for it, and to escape payment. He pays 
the debt because the State, through its courts and their offi- 
cials, compels him to pay it, not because he has agreed with 
the other party to pay it. 

Again, A takes and uses up certain property, such as 
grass, grain, "clothing, or money, believing it to be his, 
when in fact it is B's. In such a case, B has his choice of 
two forms of action against A : He may bring an action 
in tort, for the conversion of the property — that is, he may 
treat A's taking and use of the property as a legal wrong, 
and recover damages against A for the wrong; or, he may 
waive the tort,^ as it is said, and may sue A for the value of 
the property, precisely as though he had sold it to A. The 
liahility of A in this second form of action is often spofi-en 
of as a contract liability. Here, as in the case of the judg- 
ment., there is no actual promise to pay on the part of the 
person who is forced by the court to pay. 

47. Quasi contracts. — In both of these cases, and in 
many similar ones which might be referred to, there is not 
a true contract between the parties. There is no meeting of 

^See Appendix, p. 315. 



CONTRACTS 35 

minds — no agreement. The liability of the one party to the 
other does not rest on an actual promise ; it rests on a rule 
of law. These cases are examples of quasi contracts — of 
obligations resembling contracts — not of true contracts; of 
liabilities arising from a rule of law, not from the volun- 
tary agreement of the parties. They are spoken of as re- 
sembling contracts only because the law permits them to be 
enforced by contract actions. 

48. Contract may be made by acts. — While an actual 
promise is essential to a true contract, it is not necessary 
that the premise he made in express words. A hails a street- 
car and enters it as a passenger. He has made a contract 
with the street-car company, binding him to pay the regular 
fare to the company, and binding it to transport him as a 
passenger, even though not a word about the fare or the 
ride may have passed between him and the company's 
agent, the conductor. By the very act of running its cars 
the company makes an offer to carry passengers for a re- 
muneration. This offer the passenger accepts when he en- 
ters the car. Each makes a promise to the other which 
the law will enforce. 

It is true the promises are not expressed in words, as 
when A says to B, " I will work for you, as bookkeeper, for 
a year, at fifty dollars a month," and B says, " I accept 
your offer, and will pay your price"; but the promises are 
as actual in the one case as in the other. The street-car 
company and the passenger intend to enter into a con- 
tract, and understand that their acts are equivalent to 
words. 

49. Offer and acceptance. — If any case of true contract 
is analyzed, it will be found that the process leading up to 
its formation always involves an offer hy one party to do 
something, which he has a legal right to refrain from doing, 
or to forhear doing something which he has a legal right to 
do; and an acceptance of that offer hy the other party. With- 



36 ESSENTIALS OF BUSINESS LAW 

out such offer and acceptance, made either by words or by 
acts, there can not be a true contract. 

50. Intention to contract. — It is to be borne in mind, 
however, that not every offer and acceptance constitutes a 
contract. B accepts A's invitation to dinner. Here is an 
offer by A to supply B with a meal if B will take the trou- 
ble to come to A's house, and the offer is accepted by B; 
but there is no contract. A^s promise to furnish the dinner 
is not one " enforceable by law." It is a social engagement 
only J and not intended by the parties to impose legal lia- 
hilities on either of them. 

Again, X hands his watch to Y, who gives his check to 
X for three hundred dollars. Upon these facts it would ap- 
pear that X had offered to sell his watch to Y for three 
hundred dollars; that Y had accepted the offer and had 
given his check for the purchase price. But suppose Y, 
when sued on the check by X, shows that the whole matter 
was a piece of frolic; that the watch was worth only fif- 
teen dollars; that he had no money in the bank on which 
the check was drawn ; that after he was sued he tendered the 
watch to X, and that both he and X, as well as the others 
who were present, understood that the ivhole affair was one 
of frolic and banter, and not one of business, surely a court 
should hold, as it has held, that there was no contract be- 
tween X and Y. 

It is true such fooling is hazardous for Y; for when 
we come to discuss negotiable paper, we shall discover that 
had X sold and indorsed the check directly after receiving 
it to one who knew nothing of the transaction in which it 
was given, such purchaser could have compelled Y to pay 
the full amount. 

51. Preliminary negotiations. — Such cases, as we have 
been considering, of social engagements and of frolic, do 
not often come before the courts, and when they do are not 
difficult to decide. But another class of cases, in which 



. CONTRACTS 3Y 

there is an appearance of an offer and acceptance, intended 
by the parties to constitute a contract, is more troublesome. 
A standard example of this class is an old English case, de- 
cided three centuries or more ago. " The defendant told 
the plaintiff that he would give one hundred pounds to 
him who married his daughter with his consent. Plaintiff 
married defendant's daughter with his consent, and after- 
ward claimed the fulfilment of the promise, and brought an 
action upon it. It was held not to he reasonable that a man 
should he hound hy general words spoken to excite suitors.'^ 

Similar decisions have been made in cases where business 
circulars have been sent out to excite customers. If the 
court is satisfied, from the circumstances of the case, that 
what bears the appearance of an offer is put forward simply 
as a statement of infention to do something — for example, 
to sell goods at auction — or as a preliminary to business 
negotiations, it will hold that the mere acceptance of it 
by the other party does not turn the transaction into a con- 
tract. A bookseller's catalogue with the prices stated for 
the various books or a business circular calling atteiition to 
specified goods which are for sale at specified prices .is to 
be treated as a preliminary announcement or advertisement 
of intention, not as a formal offer to each person to whom it 
is sent. 

52. Offer must be definite. — Not only must the offer 
be made with a view to the immediate formation of a 
contract, but it must be made to a definite person. A man's 
obligations to the indefinite public are political, not con- 
tractual. He does not enter into a contract with his neigh- 
bors or fellow-citizens to keep the peace, to live honestly, 
and to perform his duties in society. In order to come 
under a contract obligation, he must make an offer which 
he intends for accepta^ice hy a definite person. 

This does not prevent a contract arising in a case where 
one offers a reward to the finder of property, to the captor of 



38 ESSENTIALS OF BUSINESS LAW 

a criminal, or to one doing some other definite act. It is 
true that the offer is not made to an ascertained person; 
that it is made to any one who finds the property or cap- 
tures the criminal, or does the specified act ; but the accept- 
ance of the offer, which consists in finding the property, 
or capturing the criminal, or doing the designated act, fixes 
at once the individuality of the other party. Hence, the 
moment the contract comes into existence its obligation is 
between definite persons. An example is afforded by a case 
in Wisconsin. B publicly announced that he would give 
five thousand dollars to any one who would bring the body 
of his wife, alive or dead, out of a burning building. Upon 
hearing the announcement, C entered the burning building 
and brought out the dead body of B's wife. B was bound by 
contract to pay the reward to C. 

Such a case is, in principle, much like that of one who 
makes a promissory note payable to bearer. He promises 
to pay it, not to the world at large, but to the individual who 
is in lawful possession of it, when it falls due, although he 
does nol name that individual in the note; and, of course, 
when it is made, can not be certain of the personality of the 
one who may chance to be the holder when it falls due. 

53. Definiteness of promise. — The subject-matter of the 
contract, as well as the parties, must be definite. A^ague- 
ness and uncertainty of statement usually indicate that the 
parties do not intend to bind themselves by contract; that 
each is willing to trust to the other's sense of fairness, and 
is not striving to bring him under the pressure of a legal 
obligation. A bought a horse from B for fifty pounds cash, 
and promised to pay five pounds more or the buying of an- 
other horse, if the horse was lucky to him. Such a promise 
was declared to he too loose and vague to constitute a con- 
tract. Again, W promised to sell certain ffoods to X for 
such price as they might a,<?ree upon thereafter. Here a part 
of the subject-matter — the goods — was definite, but the 



CONTRACTS 39 

other part — the price — was indefinite, and might remain 
indefinite always, for W and X might never agree upon it. 
Consequently there was no contract of sale. 

Even when a party clearly intends to enter into a con- 
tract, his carelessness in describing the subject-matter may 
prevent the formation of a contract. M sent a postal card 
to N, with these words : " Please send me pice of counter 
screens like draft/' and following these* words was a draft 
of the screen with measurements. The court held that the 
card was unintelligible ; that " pice " might have been in- 
tended for " price " or for " piece," and that N had no right 
to treat the card as an order for a " piece " of counter 
screens. 

54. Acceptance must be absolute and unqualified. — 
When A writes to B that he will sell his farm to B for five 
thousand dollars cash, and B sends the written answer, 
" I accept the offer contained in your letter " of such a 
date, a valid contract is made. But if B replies, '* I will 
buy your farm for five thousand dollars, provided you will , 
tahe in payment notes of C which I hold,^^ no contract is 
formed. A's offer calls for cash, and B does not accept this 
absolutely; he accepts the offer upon condition that it be 
changed in a material respect. As a matter of law, B does 
not accept at all. His answer is a new offer. A may accept 
this counter-offer or not. If he does accept it, absolutely 
and unequivocally, a contract is consummated. If, on the 
other hand, he rejects it, not only is a contract not con- 
cluded, but, thereafter, B has no right to conclude a con- 
tract by accepting A's original offer. B's counter-offer was, 
in legal effect, a rejection of A's offer. He has sinned away 
his day of grace, and lost a bargain. In contracts as in 
ethics, one should agree with his adversary quickly; agree 
with him absolutely and unconditionally. The terms of the 
acceptance must he identical in meaning with those of the 
offer. 



40 ESSENTIALS OP BUSINESS LAW 

55. Right to withdraw offer. — We have said that the 
offeree should accept the offer quickly, if he wishes to be 
sure of concluding a contract upon its terms. The im- 
portance of prompt action is due to the fact that tlie offerer 
may, at any moment, withdraw his offer. He may do this, 
although in the offer he has stated that it should remain 
open for a specified time. Such a statement is not legally 
binding on him, for reasons which will appear when we take 
up the topic of Consideration. On the other hand, it 
serves as a notice to the offeree that the offer will not be 
held open beyond the specified time, and that an accept- 
ance after that period can not be made. 

56. How offer may be withdrawn. — Ordinarily the with- 
drawal of an offer is made in express terms, and, as a mat- 
ter of safety, it should be so made, whenever that is prac- 
ticable. If the withdrawal is communicated to the offeree 
before acceptance, his right to accept is terminated. 

At times, however, the offer is withdrawn by the acts or 
conduct of the offerer, instead of by words. Cases of this 
sort — that is, of implied withdrawal or revocation of the 
offer — ^have given the courts not a little trouble, and the 
judicial decisions, as well as the views of legal writers, 
are not entirely in accord regarding them. An example of 
this class of cases is the following: offers to sell certain 
goods to C for a stated price, at any time within two days. 
A few hours later he sells and delivers them to D for a 
larger price. As he has transferred the goods to D by a 
valid contract, he can not sell them thereafter to C ; but to 
prevent C from accepting his offer, and thus hringing him 
under a contract obligation to sell, he should notify C at 
once that the offer is withdrawn. Undoubtedly, if C were 
present when the sale to D was made, his personal 
knowledge of the transaction would absolve from giv- 
ing him any formal notice. Such notification would be 
idle. C could put but one construction on O's conduct — 



CONTRACTS 41 

namely, that it was an implied or tacit revocation of the 
offer. 

57. The lapsing of an offer. — Another example of im- 
plied revocation or withdrawal of an offer is afforded when 
a reasonable time has elapsed since the offer was made. It 
would be unfair as well as contrary to the understanding 
and usages of business men to hold that when a person 
makes an offer to sell an article at a specified price, or to 
perform services for a given compensation, it is made for 
all time. If a party offers to sell wheat at a dollar a bushel, 
or to carry freight at a specified rate, or to buy stocks at a 
fixed price, he does not intend to hold himself in readiness 
forever to supply the wheat, or to carry the freight, or to 
transfer the stocks, at the rate named, or at all; and the 
offeree, as a reasonable business man, understands that the 
offerer had no such intention. The law seeks to give effect 
to the real intentions and understandings of the parties. 
Accordingly, in each case the court inquires, what do the 
business usages applicable to the particular transaction 
warrant us in declaring is a reasonable time? In some 
cases forty-eight hours have been held more than a reason- 
able time; and, undoubtedly, where an offer is made of 
stocks or other articles of a fluctuating value, or of very 
perishable articles, such as certain kinds of fruit, an offer 
might be impliedly revoked by the lapse of six hours, and 
an acceptance thereafter would be too late. 

58. Death of the offerer. — An offer can not be turned 
into a contract by its acceptance after the offerer's death. 
In the language of a learned judge : " The continuance of 
an offer is in the nature of its constant repetition. Ob- 
viously this can no more be done by a dead man than a con- 
tract can be made by a dead man in the first instance." It 
is often said that the death of the offerer operates as an 
implied withdrawal or revocation of the offer. This lan- 
guage is hardly appropriate. Revocation or withdrawal 



42 ESSENTIALS OF BUSINESS LAW 

signifies an act of the offerer, indicating his change of pur- 
pose. It is a voluntary refusal to contract ; while the death 
of the offerer interrupts the formation of a contract hy the 
removal of one of the parties. That the offerer's death 
ought not to be spoken of as a revocation is apparent from 
the fact that it renders a subsequent acceptance worthless, 
even though the offeree did not know of the death when he 
sent his acceptance. 

59. Communication of offer. — Something should be 
added about the communication of the offer as w^ell as of 
the acceptance and of the revocation when the parties are in 
different places during their negotiations. 

With respect to the offer there is little if any difficulty. 
Until this is brought to the knowledge of the offeree it is 
entirely ineffective. A, in Chicago, may send by mail or by 
telegraph to B, in New York, an offer to sell a thousand 
bushels of wheat at a dollar a bushel. Before this comes 
to B's knowledge he may order from A a thousand bushels 
of wheat at a dollar a bushel. These two offers do not make 
a contract. In order to turn A's offer into a contract B 
must accept it, and in order to turn B's offer into a contract 
A must accept that. Until acceptance hy one or the other, 
there is no meeting of minds. Their opinions and interests 
may coincide, but there is no consensus of wills; there is no 
mutual consent to a contract obligation. 

60. Communication of withdrawal. — Moreover, if be- 
fore the offeree accepts, a revocation from the offerer is 
brought to his knowledge, his right to accept is lost. It is 
not lost or in any way affected hy an attempted revocation 
which is not hr ought to his hnoivledge. 

-■ A sends an offer by mail. Before the letter reaches B, 
^6t before his acceptance of the offer, he receives a telegram 
'Si-oih A' withdrawing the offer. He can not bring A into a 
■Contract by thereafter accepting the offer. On the other 
^hand, if the telegram does not come to B's knowledge until 



CONTRACTS 43 

after he has accepted the offer, it is ineffective and A is 
bound by contract. True, there is no actual meeting of 
minds in such a case, but as the continuance of an offer is 
deemed by the law a constant repetition of it, there is a 
conventional meeting of minds. Without such a doctrine 
it would be extremely hazardous to accept offers made by 
mail or telegraph. 

It is declared by some writers that an acceptance may be 
revoked before it comes to the knowledge of the offerer. In, 
the next paragraph, however, we shall see that an accept- 
ance may conclude the contract even before it is communi- 
cated to the offerer; nay, though it never reaches him. In 
such cases, surely, the revocation of an acceptance ought 
not to he allowed, and there is very little judicial authority 
in favor of allowing it. 

61. Communication of acceptance. — Upon this point 
there is some difference of opinion, although the prevail- 
ing view, both in England and in this country, is that a 
person who makes an offer by letter or hy telegram becomes 
bound by contract the moment the offeree despatches his 
acceptance by mail or by telegraph. The letter or telegram 
of acceptance may miscarry, still the offerer is bound, un- 
less, indeed, the miscarriage is due to some fault on the 
part of the offeree, such as a misdirection. This view is 
based on the ground that the offerer impliedly authorizes 
the offeree to send his acceptance by mail or by telegraph. 
A delivery of the acceptance, therefore, to the post-office or 
telegraph agents has the same legal effect as a delivery to 
an agent of the offerer. 

This vicAv has been criticized severely in England, as 
well as in this country, and was rejected in an early Massa- 
chusetts decision. Under that decision an acceptance, to be 
effective, must be actually communicated — must be brought 
to the knowledge of the offerer. Until that happens there 
is no contract. Recently, however^ the Supreme Court of 



44: ESSENTIALS OF BUSINESS LAW 

that State has overruled the decision referred to, and 
adopted the prevailing view. 

Sir Frederick Pollock, after expressing regret that the 
earlier Massachusetts view had not been taken by the Eng- 
lish courts, makes this remark, which should be borne in 
mind by the reader : " The practical conclusion seems to 
be that every prudent man who makes an offer of any im- 
portance by letter should expressly make it conditional on 
his actual receipt of an acceptance within some definite 
time/' Such is the frequent, perhaps ordinary, practise of 
business men in this country. 

62. Necessity of consideration. — It is a general rule of 
English law that a promise is not legally enforceable unless 
it is supported by a consideration. Before attempting to 
explain this rule, it may be well to dispose of its excep- 
tions. These are found in so-called contracts of record — 
that is, court judgments — and contracts under seal. Of the 
former class we need say nothing in this connection, for 
we have sl;own already that they are not true contracts 
at all. 

63. Contracts under seal. — Of the second class, the typ- 
ical representative is a bond, of which the following is a 
specimen : 

Know All Men by these Presents. That I, John James, of 
New York city, am held and firmly bound unto Joseph Johnson, of 
the same place, in the sum of one thousand dollars, to be paid De- 
cember 1, 1903, to said Johnson, his attorney, executors, adminis- 
trators, or assigns; to which payment I bind myself, my heirs, ex- 
ecutors, and administrators firmly by these presents. 

In Testimony Whereof, I have set my hand and seal, this First 
day of December One thousand nine hundred and one. 

John James. [Seal.] 

The foregoing is called an absolute bond, because it 
binds the maker to pay the sum named absolutely. Often 
a bond contains a conditional clause, inserted between the 



CONTRACTS 45 

words " firmly by these presents " and "In Testimony 
Whereof" in the above form, which provides that if the 
obligor — that is, the maker of the bond — does a certain 
act, for example, pays a stipulated sum of money, or con- 
veys described property, or honestly performs the duties of 
some position, as of bank teller or cashier, or of private or 
public treasurer, then the '■' bond shall be void ; otherwise 
it shall remain in full force and effect/' 

64. A deed. — A bond is not the only form of contract 
under seal. The parties to any written agreement may con- 
vert it into a sealed contract by intentionally attaching a 
seal and delivering it as a " deed.'' This word " deed," 
although popularly used to designate a conveyance of land, 
is the technical term in law for any sealed instrument. 
Perhaps the narrowing of this term in popular usage is 
due to the fact that the only important case in which the 
common law required a seal to be attached to a written 
agreement of a natural person was that of a conveyance of 
real estate. Such a conveyance would naturally be deemed a 
deed par excellence. At present, however, a seal is required 
to be attached to various contracts of natural persons, as 
well as to those of corporations, in order to render them 
valid and effective; but the statutes on this subject are so 
different in different States that no attempt will be made to 
give their provisions here. 

The execution of a deed, or contract under seal, con- 
sisted at common law in sealing and delivering it. Both 
of these acts were necessary to its validity, but the signa- 
ture of the maker was not. Indeed, during the middle 
ages, when the legal rules respecting deeds became fixed, 
writing was a rare accomplishment, and men generally at^ 
tested their contracts and conve5^ances by affixing their seals, 
rather than by writing their names. At present the execu- 
tion of a deed consists in signing as well as sealing and 
delivering it. 
5 



46 ESSENTIALS OF BUSINESS LAW 

65. What constitutes a seal, — The common-law seal was 
an impression made on wax, wafer^ or other substance at- 
tached to the paper or parchment on which the agreement 
was written. This impression was made with a signet-ring 
or die, often having some heraldic device peculiar to its 
owner. In most of onr States no such formal impression 
is necessary. A piece of wafer, or of adhesive paper, or an 
impression made directly upon the paper or parchment by 
a die, and in some States even a scroll or a flourish of a pen, 
may serve as a seal. Here again the statutes of each State 
must be consulted if the reader would know what changes 
have been made in the common-law definition of a seal. 

It is not necessary that the maker of a deed personally 
attach the seal. It is enough if he declares by word or 
action that he adopts the seal as his own. Writing his 
name opposite the seal, and delivering the instrument as 
his deed will amount to an adoption of the seal. 

66. Delivery of a deed. — The formal delivery of a con^ 
tract under seal consists ordinarily in handing it over to 
the party to be benefited by it; but if the party making it 
declares in good faith that he delivers it as his act and 
deed, such declaration is equivalent to delivery, and he will 
be bound by it, although he retains it in his custody. The 
transaction has the same legal effect as though he had 
handed the deed to the obligee (the party to be benefited), 
and the latter had then passed it back, with the request that 
it be kept for him. 

67. Deed differs from simple contract, (a) In respect 
of consideration. — We have described thus fully the contract 
under seal, because of the important respects in which it 
differs from the ordinary or simple contract. 

In the first place, as we have stated already, it is bind- 
ing without a consideration, while every simple contract 
must have a consideration. This is explained generally by 
the statement that the seal conclusively imports a considera- 



CONTRACTS 47 

tion. The true explanation, however, appears to be that the 
rules of English law relating to deeds, or contracts under 
seal, were settled before the "doctrine of consideration for 
simple contracts was developed; and thus deeds escaped 
from the application of that doctrine. Contracts under seal 
bind the contractor, because they are wider seal — because 
the early common law declared an agreement made in this 
form, to be binding on the maker. In other words, a deed is 
enforceable by the law because of its form, while a simple 
contract — a contract not under seal — is enforceable because 
of a consideration. 

68. (h) Delivery upon condition. — The second differ- 
ence relates to the effect of delivery. If the maker of a 
deed delivers it to the other party upon some condition, 
for example, that it shall not bind the maker until a cer- 
tain event happens, the delivery is absolute and final; the 
deed is binding on the maker, and the condition is void. 
In order to make such a condition effective, the obligor 
should not deliver the deed directly to the obligee, but to 
a third party with directions that he deliver it to the obligee 
when the event happens. While so held by the third party, 
it is said to be an escrow, a mere scroll or writing, not a 
contract obligation. When the stipulated event happens 
and the deed is delivered by the third party to the obligee, 
it takes effect, as a rule, not from that date, but from the 
date of its delivery by the maker to the third person. 

A written contract not under seal may be delivered by 
the party making it directly to the other party, upon any 
condition which the maker may see fit to impose ; and until 
and unless such condition is fulfilled, the holder can take 
no benefit under it. For example, A offers his horse to B 
for three hundred dollars. B replies that he will look at 
the horse, and if it suits him he will buy it at that price. 
Thereupon he writes, signs, and hands to A the following 
paper : " On demand, I promise to pay A three hundred 



48 ESSENTIALS OF BUSINESS LAW 

dollars at my place of business," saying that if the horse 
does not suit him this paper shall be returned. The horse 
does not suit him, and he notifies A. The writing is worth- 
less. 

69. (c) Estoppel by deed. — Another point of difference 
is that a statement in a deed which a person admits having 
executed and delivered can not be disputed by him. To 
use a technical legal term, he is " estopped " from denying 
any matter which he has asserted in a deed. Not so with 
respect to a simple contract. The writing is strong evi- 
dence against the maker that every statement in it is true, 
but it is not conclusive. The maker may show that a state- 
ment contained in the writing is erroneous, unless such 
statement has been relied upon by the other party and has 
induced him to alter his position. In other words, the 
maker of a deed is estopped from denying any statement in 
it because it is in the deed. The maker of a written con- 
tract not under seal is estopped from denying a statement 
in it only when that statement has induced the other party 
to alter his position in reliance upon its truth. 

70. (d) Merger. — Another point of difference is dis- 
closed by the doctrine of " merger." If A is owing B one 
hundred dollars, and gives him a written promise to pay it 
on a certain day, but does not pay as agreed, B may sue A 
either on the original debt or on the wTitten contract. If, 
however, A had given his bond for the payment of the 
money, his original indebtedness would have been extin- 
guished, and the bond would be the only contract remain- 
ing between them. The original contract for the payment 
of this money would be '^ merged " in the sealed contract, 
because that is regarded by the law as of a higher grade 
than any simple contract. 

71. (e) Specialty creditors preferred. — This higher na- 
ture of a deed or bond — also spoken of as a specialty — is 
ghown again by the preference given to it by the corrimQB 



CONTRACTS 49 

law over simple contracts in the settlement of a deceased 
person's estate. A specialty creditor was to be paid in full 
before simple contract creditors could have anything. 

72. (/) Limitations of actions. — The last important 
difference which we shall notice is in the limitation of 
actions. A party who fails to perform a simple contract 
at the agreed time must be sued within six years from that 
date, or the cause of action will be outlawed ; while a party 
who breaks a contract under seal remains liable to an action 
for twenty years thereafter. 

73. (g) Statutory chang^es. — Some of these qualities 
of the specialty or sealed contract have been changed by 
legislation in most of our States. Under many statutes a 
specialty creditor has no longer a preference over a simple 
contract creditor in the distribution of a deceased person's 
estate ; nor does a seal make a contract absolutely binding. 
In the language of some of these statutes, the' seal raises 
a presumption that a consideration has been given by the 
obligee, but this presumption is not conclusive. The maker, 
or obligor, is allowed to dispute and overcome this presump- 
tion by evidence that no consideration was given. 

In States where such statutes are in force a person who 
is sued on a sealed contract will lose his case unless he can 
show that a consideration was not given; while one sued 
on a simple contract will win his case unless the other 
party shows that a consideration was given. 

74. The doctrine of consideration. — We shall now ex- 
plain the meaning of consideration in our law of contracts. 
It would be quite irrelevant here to trace the history of this 
doctrine, for that would involve the explanation of much 
that is obsolete, and more that is highly technical in Eng- 
lish common law. N"or shall we attempt to show that our 
law is wiser or better than the Roman law in requiring a 
consideration for simple contracts. We shall content our- 
selves with an effort to make plain the doctrine itself, 



60 ESSENTIALS OF BUSINESS LAW 

•75. Definition of the term. — A learned English judge 
has defined consideration as consisting " either in some 
rights interest, profit, or benefit accruing to one party, or 
some forbearance, detriment, loss, or responsibility given, 
sufi:ered, or undertaken by the other." A shorter statement, 
often found in law books and in the opinions of judges, is 
that it consists in a benefit to the promisor or a detriment 
to the promisee. A still shorter and more accurate defini- 
tion is " a detriment to the promisee." This is the very 
essence of consideration. It must be present in every case, 
to make the promise enforceable by law, while " a right, 
interest, profit, or benefit accruing " to the promisor is not 
essential. An every-day transaction will illustrate this. 

A wishes to buy property, or to borrow money from B. 
The latter will not trust him, but says, if you can get C 
to promise payment to me, you can have the property or 
the money. C does so promise, and B, on the strength of 
that promise, delivers the property or the money to A. 
Here is a valid contract between B and C, and yet C, the 
promisor, has derived no benefit from the transaction. B, 
however, has sustained a detriment. He has parted with 
money or other property. He has furnished a valuable con- 
sideration for C's promise. 

76. Surrender of a legal right. — But parting with one's 
property is not the only way in which a valuable considera- 
tion may be furnished by the promisee. The surrender or 
forbearance of any legal right in exchange for the promise 
constitutes a valuable consideration. I say to you. Let 
me take your watch for an hour, and I will return it in as 
good condition as it now is. You hand me the watch. I 
have entered into a binding contract with you. I may not 
need the watch. My motive in asking for it may be as 
idle and whimsical as that of the child who wants " to shee 
the wheels go wound." That is immaterial. The watch 
is yours. You had a legal right to keep it in your posses- 



CONTRACTS 51 

sion. When you handed it to me you surrendered that right 
at my request, and in exchange for my promise. My prom- 
ise to return it in its then condition was based on a valuable 
consideration, and if the watch is injured while in my 
possession, or if I do not return it, I am liable to you 
in damages for my breach of contract. 

77. Forbearance of a legal right. — This also constitutes 
a valuable consideration for a promise when made at the 
request of the promisor. The following is an example : 
A is pressing B to pay a debt due A. C asks him not 
to sue B, and promises that if A will forbear suing for a 
definite time or a reasonable time, he will pay the debt. 
A assents. This forbearance of his legal right to sue at 
once is a valuable consideration for C's promise, and a 
contract is made between C and A. 

78. At the request of the promisor. — It is important to 
bear in mind that the surrender or forbearance of a legal 
right must be made at the request of the promisor. If A, 
seeing that B's haystack is in danger from fire, leaves his 
own work and spends time and energy in saving his neigh- 
bor's property, he can not recover therefor against B. Nay, 
even though B, upon learning of A's services, promises to 
pay him a stipulated sum, his promise is not enforceable by 
English common law, for the services were not rendered 
at his request. He may be under a moral obligation to A, 
but he is not subject to a legal obligation. True, A suf- 
fered a detriment and B received a benefit, but no legal 
consideration for the promise existed. This is called by 
some writers a case of unreal consideration. 

Another case, falling within the same principle, is the 
following: X owes Y one hundred dollars. He pays fifty 
dollars to Y upon the latter's promise to take it in satis- 
faction of the entire debt. Here is no contract binding 
upon Y. He can maintain an action the next moment 
against X for the remaining fifty dollars. When X paid 



62 ESSENTIALS OF BUSINESS LAW 

one-half of the debt he sustained no legal detriment. He 
was doing no more than he was legally bound to do. But 
suppose, instead of paying money, X had delivered or prom- 
ised to deliver a cow, worth fifty dollars, to Y, upon his 
promising to take her in satisfaction of the debt. Could 
Y thereafter recover the remaining fifty dollars from X? 
No, because X was not legally bound to deliver the cow; 
he was bound only to pay money, and doing anything over 
and above what by law he was bound to do is a valuable con- 
sideration for Y's promise to accept it in satisfaction of the 
original debt. 

79. Artificiality of this doctrine. — Probably most read- 
ers will agree that the language which Lord Coke once ad- 
dressed to his Majesty King James I is applicable to 
this doctrine. The king had been advised by Archbishop 
Bancroft that he had the right to judge any case which was 
brought before an English court. Accordingly he sum- 
moned the judges to know what they had to say against 
this view. Lord Coke informed him that he had no such 
right. Whereupon the king expressed surprise, saying that 
he had always understood that English law was founded 
upon reason, and that he and others had reason as well as 
the judges. To which Lord Coke replied : " True it is 
that God has endowed your Majesty with excellent science 
as well as great gifts of nature, but your Majesty will allow 
me to say, with all reverence, that you are not learned in 
the laws of this your realm of England, and I crave to re- 
mind your Majesty that causes which concern life, or in- 
heritance, or goods, or fortunes of your subjects are not 
decided by natural reason, but by the artificial reason and 
judgment of the law, which law is an art which requires 
long study and experience, before that a man can attain to 
the cognizance of it." 

80. The Statute of Frauds. — Another branch of our law 
of contract which is highly artificial and confusing is that 



CONTRACTS 53 

which has grown out of the statute of frauds. The motives 
of Parliament in passing this statute were excellent, and 
the need of legislation was undoubtedly great. At the time 
of its enactment (a. d. 1676) parties to a lawsuit were not 
allowed to be witnesses, because the interest which a 
plaintiff or a defendant had in winning the suit, it was 
thought, would lead him to swear falsely. What was the 
result ? The result was the plaintiff often hired persons to 
swear falsely in his behalf, only to be met by perjured wit- 
nesses on behalf of the defendant. This condition of things 
certainly needed correction. In the light of subsequent ex- 
perience, ■ it seems clear that the proper corrective would 
have been a statute permitting the parties to be witnesses. 
Parliament thought otherwise. In its judgment the cure for 
the evil was a statute requiring a prescribed kind of evi- 
dence for nearly every important business transaction. 

Accordingly this statute, which in its preamble recites 
that it was enacted " for prevention of many fraudulent 
practises which are commonly endeavored to be upheld by 
perjury and subornation of perjury," required transfers 
of land to be in writing and signed by the parties making 
them or their authorized agents ; that wills should be in 
writing and executed in a prescribed manner; that certain 
contracts should be reduced to writing, while others should 
be proved either by a memorandum in writing, or by cer- 
tain formal acts, such as the payment of a part of the price 
or an acceptance and receipt of a part of the goods by the 
purchaser. 

81. Evils resulting from the statute. — Some portions 
of this act of Parliament have proved beneficial, especially 
those relating to wills; but the provisions relating to con- 
tracts have caused greater evils than they have cured. 
More than half a century ago Chancellor Kent expressed 
the opinion that the statute had been explained at a cost 
of not less than five million dollars, and it still continues 



64 ESSENTIALS OF BUSINESS LAW 

one of the most fruitful sources of vexatious and expensive 
as well as of dishonorable litigation. An English chief 
justice declared, in one of his decisions, that he did not 
know what the draftsman of the statute meant by certain 
words in it, and he did not believe the draftsman knew. 
Another eminent jurist of England, after a careful study 
of the cases to which this piece of legislation has given rise, 
did not hesitate to speak of the provisions relating to 
contracts as a nuisance, and to advise their repeal. In his 
judgment these provisions are a constant incentive to dis- 
honorable practises, and their evil influence is checked only 
by the fact that they have fallen practically into 'disuse in 
the larger commercial towns. 

Notwithstanding all this, most of these objectionable 
provisions have been reenacted by the great majority of 
our State legislatures, and some account of them must be 
given here. We shall not undertake, however, to deal with 
them in an exhaustive or a technical manner. 

82. Sections IV and XVII. — These are the sections of 
the English statute which are of chief importance in busi- 
ness transactions. They read as follows : 

"IV. That no action shall be brought (1) whereby to charge 
any executor or administrator upon any special promise to answer 
damages out of his own estate; (2) or whereby to charge the defend- 
ant upon any special promise to answer for the debt, default, or 
miscarriages of another person ; (3) or to charge any person upon 
any agreement made upon consideration of marriage ; (4) or upon 
any contract or sale of lands, tenements, or hereditaments, or any in- 
terest in or concerning them; (5) or upon any agreement that is not 
to be performed within the space of one year from the making 
thereof, unless the agreement upon w^hich such action shall be 
brought, or some memorandum or note thereof, shall be in writing, 
and signed by the party to be charged therewith, or some other per- 
son thereunto by him lawfully authorized." 

" XVII. That no contract for the sale of any goods, wares, and 
merchandises, for the price of ten pounds sterling or upwards, shall 



CONTRACTS 55 

be allowed to be good, except the buyer shall accept part of the 
goods so sold, and actually receive the same, or give something in 
earnest to bind the bargain, or in part payment, or that some note 
or memorandum in writing of the said bargain be made and signed 
by the parties to be charged by such contract, or their agents there- 
unto lawfully authorized." ^ 

83. Contracts are not void which fail to comply with 
the statute. — It will be observed th'at the statute does not 
declare that any of the enumerated contracts are void, if 
not made in accordance with the legislative requirements. 
Its language in the fourth section is " no action shall be 
brought '' ; in the seventeenth, " no contract . . . shall be 
allowed to be good/^ unless those requirements have been 
complied with. In some of our States this phraseology has 
been changed, and it is declared that these contracts shall 
be void unless they conform to the statute. Notwith- 
standing this change in language, the prevailing view in 
^.his country is the same as in England — viz., "That the 
form required does not go to the existence of the con- 
tract. The contract exists though it may not be clothed 
with the prescribed form." When a party is sued on such 
a contract, he can defeat his adversary by pleading and prov- 
ing that the statutory requirements were not complied with. 
To state the rule in another way, the contract is valid, but 
it is not enforceable in a lawsuit, provided the other party 
avails himself of his statutory defense. 

84. These sections have promoted artificial and tecb 
nical reasoning. — We can not attempt, in an elementarj 
treatise, to explain the various clauses of the fourth section^ 

^ Neither the language nor the substance of this section appears in 
the statutes of Alabama, Delaware, Kansas, Kentucky, Louisi- 
ana, New Mexico, North Carolina, Tennessee, Texas, Virginia, or 
West Virginia. In the other States this section has been reenacted, 
with varying modifications. See Uniform Sales Act, Mass. L. 1911, 
Ch. 571, § 4. 



56 ESSENTIALS OP BUSINESS LAW 

for that would lead us into some of the most perplexing 
divisions of the law of contract. For example, the second 
clause, relating to " any special promise to answer for the 
debt, default, or miscarriage of another person," has given 
rise to an astonishing amount of litigation, in which the 
reasoning of judges has been highly artificial and technical, 
if not obscure and confusing. 

Comments on the seventeenth section will be reserved 
for the chapter on Sales of Personal Property. 

85. The statute as a nuisance. — When the eminent Eng- 
lish judge, James Fitzjames Stephen, declared those provi- 
sions of the statute of frauds relating to contracts a nui- 
sance he gave expression, undoubtedly, to the view held 
by most business men. In large commercial centers those 
provisions are habitually ignored, and a man who attempts 
to escape from a contract, on the ground that it has not been 
put into the statutory form, is deemed guilty of dishonor- 
able conduct. The haste and rush of modern business en- 
terprise make it practically impossible for contracting 
parties to execute even the informal memorandum required 
by the statute, and as a result the statute is now invoked 
more frequently to perpetrate than to prevent frauds. It is 
the man who has entered into a losing contract who usually 
takes advantage of the statute. He pleads it, not to save 
himself from a contract which he never made, but to beat 
the other party out of what is honestly due him.^ 

And yet such is the conservatism of the English and 
American bench and bar that attempts to repeal the statute 
have generally failed. Like the irresolute Hamlet, our legal 
profession prefers to 

Bear those ills we have 
Than fly to others that we know not of. 

* The fraud promoting character of the statute is illustrated 
by Young v. Ingalsbee, 208 N. Y. 503, 102 N. E. 590, discussed in 
16 Columbia L. Eev. 273. 



CONTRACTS 57 

§ S. Capacity of Parties 

86. Persons engaged in business are generally capable 
of contracting. — In our discussion, thus far we have as- 
sumed that the parties to a contract were legally capable of 
binding themselves by it ; and, as a rule, persons engaged in 
business transactions do possess such legal capacity. There 
are exceptions, however, which we now proceed to con- 
sider. 

87. The capacity of aliens to contract. — In primitive 
law these exceptions are very numerous, but as a people 
becomes civilized and its legal system' develops, they dimin- 
ish both in number and importance. For example, primi- 
tive communities confine the power of making legal con- 
tracts to citizens. Aliens, whether from friendly or hostile 
states, are not allowed to exercise this power. Indeed, they 
are treated as not possessing any rights which citizens are 
bound to respect. 

Modern law, however, accords to alien friends nearly 
every property and contract right which is possessed by citi- 
zens, and its tendency is to treat alien enemies, who are 
allowed to remain in the country during war, as possessed 
of similar rights. Only those aliens who are citizens of the 
country at war with the one where the contract is made, 
and not resident in the latter, are incapacitated from con- 
tracting with persons in the latter during the war. Even 
contracts by such aliens, made before the war, are not an- 
nulled; they are only suspended during the war, unless 
they involve continued commercial intercourse which is 
illegal. 

During our war with Germany we did not force Ger- 
man citizens to leave the country. Under the Trading with 
the Enemy Act (40 U. S. Stat., 411, Ch. 106) and the 
President's proclamations, alien enemies who were residing 
here and obeying our laws were permitted to carry on busi- 



58 ESSE^^TiALS OF BUSINESS LAW 

ness and to sue and be sued in our courts on contracts which 
did not conflict with our rights and safety. 

88. Common-law incapacity of married women. — An- 
other class of persons incapable, at common law, of enter- 
ing into contracts, are married women. By a legal fiction, 
husband and wife were accounted but one person, and the 
husband tvas that person. Upon marriage he became pos- 
sessed of all her real property, and the absolute owner of 
all the personal property in her possession. He also had the 
right to collect and use all debts owing to her. On the 
other hand, he was bound to support her in a style befitting 
his station and fortune, and to pay all debts, owing by her 
at her marriage. 

From this common-law conception of the legal rela- 
tion of husband and wife the doctrine of her incapacity to 
enter into contracts was easily deduced. At the present 
time, however, neither that conception nor that doctrine 
prevails. Modern statutes both in England and America 
have wrought a great change. Indeed, in some of our 
States married women are empowered to take, hold, and 
transfer property, to carry on business, and to make con- 
tracts of every description, precisely as their unmarried 
sisters may do. 

89. Incapacity of convicted criminals to contract. — On 
the other hand, modern statutes have extended rather than 
diminished the contractual incapacity of one class of per- 
sons. At common law, convicted felons and outlaws could 
not enforce contracts, but were liable upon them. That is, 
they were not incapable of contracting; they were incapa- 
ble only of benefiting by contracts. At present, in Eng- 
land and in many of our States, convicted criminals, Sen- 
tenced to imprisonment in a State prison or similar insti- 
tution, are incapable of exercising any civil rights, while 
those sentenced to imprisonment for life are deemed civilly 
dead. 



CONTRACTS 59 

90. Incapacity of infants. — English law is not peculiar 
in declaring that all persons under a prescribed age are in- 
capable of contracting. Such rule is found in every legal 
system. True it is that this legal incapacity does not al- 
ways accord with actual incapacity. Many persons at the 
age of seventeen are far more capable for and may be more 
successful in business than the ordinary individual at 
the age of twenty-five. Still, the age at which a person 
shall be allowed to exercise full legal control of his person 
and property must be fixed at some point by positive law, 
and that point is fixed in England and generally in this 
country at twenty-one years/ although in some of our 
States women are declared to be of full age at eighteen.^ 
The statutes of each State should be consulted on this point, 
as well as on the point discussed in the next paragraph. 

91. When the period of infancy terminates. — By the 
common law a person attains his majority — becomes of full 
age — on the last day of his twenty-first year — that is, tlie 
day before his twenty-first birthday.^ As the law does not 
take account of fractions of a day, it is possible for one to 
attain his majority nearly forty-eight hours before he is 
actually twenty-one years of age. Suppose A was born just 
before midnight on January 1, 1890. That fraction of an 
hour is counted in law as one day. At midnight he is a 
day old, and he attains his majority at the first minute 

^ In la., La. and Tex., an infant of either sex becomes of age 
upon marriage. In Ala., Md. and Ore., a female infant becomes 
of age at 18, and in Neb., at 16, if married. In Wash., her mar- 
riage to an adult renders her of legal age. 

^ Such is the rule in Ark., Cal., Colo., Hawaii, Idaho, 111., la., 
Kan., Minn., Mo., Neb., Nev., N. Dak., Ohio, Ore., S. Dak., Vt., and 
Wash. Fla. (Compiled Laws, 1914, Art. 17) and Okla. (Rev. 
Laws, 1916, Ch. 55) authorize judicial proceedings for the re- 
moval of minors' disabilities. 

^ In Cal., N. Dak. and S. Dak., a male infant becomes of age 
on the twenty-first and a female on the eighteenth birthday. 



60 ESSENTIALS OF BUSINESS LAW 

of December 31, 1910, or immediately after midnight be- 
tween December 30 and December 31. While this method 
of reckoning prevails in most of our States, it has been 
modified by statute in some of them. 

92. The legal force of infants' contracts. — There is 
much authority, both in England and in this country, for 
the statement that an infant's contracts are absolutely void, 
if they are clearly harmful to him; that they are binding 
upon him if entered into for necessaries, and that they are 
voidable if beneficial to him but are not for necessaries. 

The better view is, however, that an infant's contracts 
of every kind {except the contract of marriage) are voidable 
and only voidable. Upon attaining majority he may ratify 
them, whether they are advantageous or disadvantageous 
to him ; and until he does so ratify them he can successfully 
defend any action at law brought against him for their en- 
forcement. 

93. Agreements by infants for necessaries are not true 
contracts. — The liability of an infant for necessaries which 
he has bought and used does not form a real exception to the 
foregoing doctrine. True, an action can be maintained 
against him, by the one supplying the necessaries, but the 
recovery will be based, not on the infant's promise, but on 
the obligation which the law imposes on him. For example, 
an infant orders a suit of clothes of a tradesman and prom- 
ises to pay forty dollars for it. He receives the suit and 
wears it out, but pays no part of the price. When sued he 
pleads and proves his infancy, and the tradesman proves the 
agreement. The tradesman is not entitled to recover forty 
dollars upon that evidence. He must go further, and prove 
that the fair value of the suit was forty dollars. If the evi- 
dence shows that the suit was worth only thirty dollars he 
can not recover more. It is clear, therefore, that the recov- 
ery against the infant is not on the agreement which he en- 
tered into. The law does not enforce the promise which he 



CONTRACTS 61 

made. His engagement to pay forty dollars for the suit 
is not a true contract, and yet that is the only contract that 
he pretended to make. He did not contract to pay the fair 
value of the suit. 

This liability of an infant to pay for necessaries what 
they are reasonably worth is imposed upon him by law for 
his benefit. If his credit could not be irrevocably pledged 
for their fair value, he might be obliged to go without them, 
and thus be subjected to grievous hardship, though pos- 
sessed of an ample estate. Tradesmen would be loath to 
trust him for anything if he were at liberty to repudiate 
every obligation. 

94. What are necessaries ? — This question can not be an- 
swered in very definite terms. On the one hand, the word 
is not limited to those articles which are absolutely essen- 
tial to the infantas existence. On the other hand, it does 
not include everything which the infant is able to pay for 
out of his income. Perhaps no more definite statement on 
this point is possible than that of an eminent English judge 
in a leading case : " Necessaries include such things as 
are fit to maintain the particular person in the state, de- 
gree, and station in life in which he is." Not simply food 
and clothing, but medicines, medical attendance, and edu- 
cational advantages come within the term. Articles of 
mere luxury, and those which minister only to the taste or 
social enjoyment of the infant are not accounted neces- 
saries, but ^' luxurious articles of utility " may fall within 
the term. Finger-rings or earrings are not necessaries, but 
cuff-buttons and a watch may be. Nor will these lose that 
character by being artistic and ornamental, if their cost is 
not out of proportion to the infant's means and station. 

Courts are not disposed to lay down general rules on 

this subject, but to decide each case according to its peculiar 

circumstances, keeping in view the principle that the lia- 

hility of an infant for necessaries is imposed upon Mm for 

6 



62 ESSENTIALS OF BUSINESS LAW 

his benefit, not for the befiefit of the tradesman. Accord- 
ingly, we find them deciding that a horse, a carriage, or a 
bicycle is not a necessary, save in exceptionable circum- 
stances, as when its use by the infant is prescribed by a 
physician, and tliat " tobacco, pipes, cigars, liquor, pistols, 
powder, saddles, bridles, whips, fiddles, and fiddle strings " 
are not necessaries for infants. 

95. Ratification of contracts by infants. — We have said 
above that an infant may ratify his contracts upon coming 
of age. Let us now inquire what amounts to a ratification. 
At common law no particular form was required. All that 
was necessary was a clear manifestation of the infant's in- 
tent to ratify or confirm the contract. But a mere acknowl- 
edgment that it had been made was not enough. The in- 
fant's words or acts must be such as to v^tmount to a new 
promise. This common-law rule has been modified in Eng- 
land and in some of our States by statutes which require the 
ratification to be in writing and signed. Such legislation, it 
has been said, is designed to guard a person, upon coming of 
age, not merely against the results of youthful inexperi- 
ence, but also against the consequences of honorable scruples 
as to the repudiation of contracts made during infancy. 

A writing, substantially as follows, would satisfy the 
requirements of the statutes referred to : 

New York, Decemler 1, 1901. 
I, Henry Smith, having promised to pay James Jackson one 
hundred doUars for a buggy bought and received from him, during 
my minority, do hereby ratify and confirm said promise, and bind 
myself, being now of full age, to its performance. 

Hekrt Smith. 

Even in a State where the common-law rule has not 
been modified, it is safer and better for the adult to have 
the ratification in writing; and if the former infant is wilh 
ing to ratify at all, he should have no objections to putting 
his ratification in writing. 



CONTRACTS 63 

96. Limitations upon the infant's right to repudiate. — 

An infant's privilege of repudiating or annulling his con- 
tracts is subject to some important limitations. If they 
are for necessaries he must pay the reasonable value of what 
he received, as we have seen. If they are for interests in 
property of a permanent nature he can not recover what he 
may have paid without restoring to the other party what 
he has received under them. For example, if an infant buys 
land and gives a mortgage to the vendor for the price, he 
can not avoid the mortgage without restoring the title of 
the land to the vendor. 

It seems to be settled, also, in England and in some of 
our States, that if an infant pays money on his contract, 
and enjoys the benefit of it, and then avoids it when he 
comes of age, he can not recover back the money he had 
paid. The courts, holding this view, declare that the privi- 
lege of infancy is to be used as a shield and not as a 
sword. Applying this doctrine, the New York Court of Ap- 
peals recently decided that a young woman, seventeen years 
of age, who bought a bicycle on the instalment plan, and 
repudiated the contract after using the wheel four months, 
could not recover the money she had paid toward the pur- 
chase price. The defendant in this case proved that the 
use of the wheel, including the deterioration in value, 
equaled the sum paid by the infant, viz., $26.25. 

It must be admitted, however, that the weight of judicial 
authority in this country is opposed to the doctrine just 
stated, and accords to the infant, upon repudiating his con- 
tract, the right to reclaim from the other party money paid 
or property transferred, even though he may have wasted, 
injured, or destroyed what was received from the other 
party, and thus may be unable to restore it to him. In 
a recent Missouri case a minor sold a piece of land, re- 
ceived the price, went on a spree and spent it. Upon com- 
ing of age a few months later he repudiated the sale and 



64 ESSENTIALS OF BUSINESS LAW 

was allowed to recover the land without repaying the price. 
Said the court : " The privilege of repudiating a contract is 
accorded an infant because of the indiscretion incident to his 
immaturity, and if he were required to restore an equivalent 
when he has wasted or squandered the property, or consid- 
eration, received, the privilege would be of no avail when 
most needed." Even under this doctrine, it will be noticed, 
the infant, upon repudiating a contract, must restore any 
part of the consideration which is still in his possession. 

It is to be borne in mind, also, that if a contract is 
executory — that is, if neither party has done what the con- 
tract calls upon him to do — the infant's right of repudiation 
is unqualified. 

97. Right to repudiate is personal to the infant. — An 
infant's privilege of repudiating his contracts is limited 
to him, Xeither the other party to the contract nor out- 
siders can take advantage of it. Undoubtedly, an adult who 
has contracted with an infant is in a bad plight. Unless 
he has been defrauded he remains bound, and must await 
the infant's decision to ratify or to rescind. 

98. Contract of marriag-e can not be rescinded by an 
infant, but a contract to marry can. — Marriage is some- 
thing more than a contract. It is a relation of the parties 
from which neither is allowed to withdraw without the ex- 
press consent of the State.^ A contract to marry is not sub- 
ject to such consideration. From it an infant may withdraw 
with impunity. It is voidable at his or her option, precisely 
as is a contract to buy a house. 

99. The contracts of lunatics and drunkards. — Concern- 
ing the liability of insane and drunken persons upon their 
contracts, the law is more or less uncertain. 

^ Legislation often provides for tlie annulment by a court of an 
infant's marriage. See N. Y. Code of Civil Procedure, § 1743, 
applied in Cunningham v. Cunningham, 206 N. Y. 341, 99 N. E. 
845 and Kruger v. Kruger, 137 App. Div. 289, 122 N. Y. Supp. 23, 



CONTRACTS 66 

If the lunatic has been judicially declared insane, or the 
intoxicated person has been judicially declared an habit- 
ual drunkard, and a guardian or trustee has been appointed 
for him and his property, his inability to contract is gen- 
erally absolute. Again, if the lunatic or drunkard is totally 
bereft of reason, a person who attempts to contract with 
him is guilty of fraudulent and dishonorable conduct, and 
a court will have little hesitation in annulling such a con- 
tract at the request of the defrauded party. 

The cases which trouble the courts, however, are those 
where the insanity or drunkenness of one party is unknown 
to the other when the contract is made. On the one hand, 
it is urged that no true contract exists, because one party 
has not a consenting mind, and mutual assent — the meet- 
ing of sane minds, the understanding of the matter agreed 
upon in the same sense — is absolutely essential to a con- 
tract. On the other hand, it is said that whenever the 
sane person has no reasonable cause t© believe the other 
party to the contract is insane or drunk, and does not take 
advantage of any delusion or stupor observable by him, he 
ought not to lose the fruits of his contract ; that it is fairer 
and safer to hold the insane or drunken person to his agree- 
ment than to give him the option of avoiding it. To lay 
down the hard and fast rule, that contracts by drunkards 
or lunatics are voidable, it is argued, would be to encourage 
unscrupulous people to feign unsoundness of mind, and 
would result in a vast amount of dishonest litigation. 

100. The Eng-lish rule. American modifications. — The 
latter view has prevailed in England, and the rule in that 
country seems to be settled as follows : " A contract made 
by a person who is drunk or of unsound mind so as to be 
incapable of understanding its effect, is voidable at that 
person's option, unless the other contracting party did not 
believe and had not reasonable cause to believe that he was 
^runk or of unsound mind," 



6Q ESSENTIALS OF BUSINESS LAW 

, In many of our States^ however, the doctrine is main- 
tained that the contract of a person so insane or drunk as 
to be incapable of understanding its effect is voidable at 
his option, whether such mental incapacity was known to 
the other party or not, unless the contract has been exe- 
cuted, and it is impossible for the drunkard or lunatic to 
restore the property he has received, or, for some other 
reason, to put the other party in substantially the same posi- 
tion he was in before the contract was performed. 

§ 3. Illegal Agreements 

101. Illegal promises not enforceable by the law, and 
hence not contracts. — From the very definition of a con- 
tract, as a promise enforceable by the law, we should con- 
clude that an agreement to do what is illegal could not take 
effect as a contract, although it was made for a valuable 
consideration, between parties capable of contracting, who 
intended to be bound by it. The law is not so futile as 
to aid a party in recovering compensation for doing what 
it has commanded him not to do. " If one bind himself to 
kill a man, burn a house, or the like, it is void," says one of 
the early writers on the common law, and such is still and 
must always remain the rule. 

102. Express prohibition or criminality of promise not 
essential. — Xor is it necessary that the act called for by 
the agreement be one which is positively prohibited by law 
in express words, or which is punishable criminally. It 
is enough that it is clearly opposed to the spirit and policy 
of a statute, or of a rule of the common law. 

Accordingly, contracts have been annulled by the courts^ 
which were made for the purpose of cheating, defrauding, 
or swindling other parties ; or for grossly immoral pur- 
poses ; or for the cornering of markets or for the sale of 
" futures," Contracts for " futures " are so named because 



CONTRACTS 67 

they are nominally for the sale and future delivery of 
articles, such as corn, wheat, or stocks, but in reality are 
mere gambling transactions. The buyer never intends to 
receive nor the seller to deliver the goods contracted for. 
The parties are in reality betting on the market price at the 
future day named in the contract, and all that the losing 
party is to pay the other is the difference between the con- 
tract price and the market price. Following is a specimen 
of such a contract, taken from an Illinois case : 

Alfked V. Booth, Grain and Provision Broker. 

Chicago, Aug. 16, 1899. 
10 Weare Com. Co. C. 31 1. Paid. 

Good till close of change. Sat., Aug. 26, 1899. 

Weare €. Co. 

The meaning of this document is that the Weare Com- 
mission Company gave to Booth an option to buy, on or 
before August 26, ten thousand bushels of corn at thirty- 
one and a half cents per bushel. 

103. Other instances of illegal contracts. — An agree- 
ment to work as a lobbyist or to pay for such work is void, 
because it tends to corrupt the public service. So is one 
to abstain from reporting a crime or from assisting in its 
prosecution, for it tends to pervert or obstruct the course 
of judicial proceedings. We can not undertake, however, 
to enumerate the various classes of contracts which have 
been pronounced illegal and therefore void. We must say 
something, however, of " contracts in restraint of trade," 
as they are called — that is, of contracts by which persons 
bind themselves not to carry on business of a certain 
kind. 

104. Reasons for holding contracts in total restraint of 
trade void. — They are summarized as follows in a leading 
Massachusetts decision, which declared void a bond binding 
the maker never to carry on or be concerned in iron found- 



68 ESSENTIALS OF BUSINESS LAW 

ing: " (1) Such contracts injure the parties making them, 
because they diminish their means of procuring livelihoods 
and a competency for their families. They tempt improvi- 
dent persons, for the sake of gain, to deprive themselves of 
the power to make future acquisitions. And they expose 
such persons to imposition and oppression. (2) They tend 
to deprive the public of the service of men in the employ- 
ments and capacities in which they may be most useful to 
the community, as well as themselves. (3) They discour- 
age industry and enterprise, and diminish the products of 
ingenuity and skill, (-i) They prevent competition and en- 
hance prices. (5) They expose the public to all the evils of 
monopoly." 

That case was decided in 1837, and fairly represents 
the law as it was then understood in England and in this 
country. But with a change in trade conditions has come 
a change in the law on this subject — a change which has 
been recognized and enforced by the House of Lords in 
Great Britain and the Supreme Court of the United States. 

105. Rule laid down by House cf Lords and Supreme 
Court. — The present rule is, that a contract in restraint of 
trade is not necessarily void. Whether it is to be upheld or 
annulled depends upon two considerations : First, is it 
harmful to the public welfare? Second, is the restraint 
upon the party seeking to repudiate the contract greater 
than is required for the protection of the other party ? 

The contract before the United States Supreme Court, 
in the case which laid down the foregoing rule, was between 
two gas companies of the city of Baltimore, to the effect 
that one of them should not put down any more pipe, and 
that competition between them should cease. As this con- 
tract was intended to secure to the parties a monopoly of 
the gas business within the city and an undue increase in 
the price of gas to the people, the court held it to be illegal 
and void as harmful to the public welfare. 



CONTRACTS 69 

A modern Ehode Island case illustrates the second con- 
sideration referred to by the Supreme Court. The defend- 
ant, who had been a successful teacher of French and Ger- 
man in plaintiff's school, agreed for a consideration not 
to teach those languages, nor to advertise to teach them, 
nor to be connected with any person or institution teaching 
them, within a year after leaving plaintiff's employment. 
The contract was held void, because the restraint imposed 
upon the defendant was greater than the plaintiff's protec- 
tion required. Had the restraint been confined to the city 
of Providence, where plaintiff's school was situated, the 
contract would have been upheld, but as it extended to the 
whole State, the court believed that it oppressed the defend- 
ant, as well as deprived people in other parts of the State 
of the chance of learning the French and German languages 
from him without benefiting the plaintiff. 

106. Public policy an unruly horse. — It must be con- 
fessed that the judicial decisions upon this topic are not 
entirely consistent, and that courts have not infrequently 
illustrated the truth of a learned judge's remark, that 
" public policy is a very unruly horse, and when once you 
get astride it, you never know where it will carry you." 
The modern tendency appears to be not to extend, but 
rather to limit the doctrine that contracts are to be an- 
nulled, because, in the opinion of the court, they are against 
public policy. A very able judge, who did much to further 
this tendency, left on record this statement, which should 
be heeded by every judicial tribunal : " If there is one thing 
which, more than another, public policy requires, it is that 
men of full age and competent understanding shall have 
the utmost liberty of contracting ; and that their contracts, 
when entered into freely and voluntarily, shall be held 
sacred, and shall be enforced by the courts. Therefore you 
have this paramount public policy to consider, that you are 
not lightly to interfere with the freedom of contract.'* 



70 ESSENTIALS OF BUSINESS LAW 

107. Stifling competition and monopolizing trade. — 

Over against such considerations it is proper, undoubtedly, 
to set the harmfulness of monopolies, the tyrannical tend- 
encies of great combinations, whether of capital or of labor, 
and the disposition of the managers of many " trusts/' as 
they are popularly called, to fleece the public. The courts 
may well continue to annul contracts entered into for the 
formation and conduct of such enterprises, and wise and 
sane legislation may be needed for the correction of such 
evils. To quote from a recent decision of the Xew York 
Court of Appeals : '' Contracts by which the parties to them 
combine for the purpose of creating a monopoly in restraint 
of trade, to prevent competition, to control and thus to 
limit production, to increase prices and maintain them, 
are contrary to sound public policy and are void." 

107 (a) . Legislation against !:ionopolies. — N'ot only con- 
gress but State legislatures have passed statutes intended to 
curb monopolies. The Interstate Commerce Act (Ch. 104, 
L. 1887, 24 St. L. 379) prohibits pooling agreements be- 
tween common carriers, as well as various other combina- 
tions, contracts or understandings which stifle competition; 
and provides for an Interstate Commission of five persons 
to enforce the statute. 

Three years later congress passed The Sherman Anti- 
Trust Act (Ch. Q^Q, L. 1890, 26 St. L. 209), intended to 
protect ^^trade and commerce against imlawful restraint and 
monopolies.^' It has been construed in a multitude of 
cases. A former Justice of the Supreme Court has spoken 
of its provisions as uncertain and its definition of wrongs 
as not precise. It was amended by the Clayton Act (Ch. 
323, L. 1914, 38 St. L, 730) in various respects. The labor 
of a human being was declared to be not a commodity or 
article of commerce; and private persons were authorized 
"to sue for and have injunctive relief . . . against threat- 
ened conduct that will cause loss or damage." Prior to this 



CONTRACTS 71 

amendment an injunction could be had only by the govern- 
ment. But a private person could sue at law for triple the 
damage which was done to his business or property by a 
violation of the Anti-Trust Act. 

The Clayton Act exempts from anti-trust laws "labor, 
agricultural or horticultural organizations' instituted for 
the purposes of mutual help and not having capital stock or 
conducted for profit/' but it does not permit such organ- 
izations, it has been judicially declared, to coerce outsiders 
to submit to their demands by blacklisting or by secondary 
boycotts. 

A Federal Trade Commission of ^Ye members was 
created in 1914 (Ch. 311, L. 1914, 38 St. L. 717) with 
power "to prevent persons, partnerships or corporations 
from unfair methods of competition in commerce." The 
commission has authority also to investigate the business 
of corporations, as well as alleged violations of anti-trust 
laws and to report its findings, with appropriate orders 
based thereon. For example a certain partnership was 
charged with stifling and suppressing competition in the 
manufacture and sale of paints, oils and kindred products, 
with using adulterated turpentine, and misleading adver- 
tisements. The commission ordered the defendant to cease 
and desist from these unfair trade practices. Many cases 
close with the order to cease and desist, consented to by 
the defendant. If, however, he refuses to obey the order, 
the commission may apply to the federal circuit court of 
appeals, upon its record of testimony and proceedings for 
a decree affirming its order. The defendant is entitled to 
a hearing, whereupon the court affirms, modifies, or sets 
aside the order. 

State legislation. — Most of the states have stringent 
laws against transactions which operate to choke competi- 
tion and unduly restrain trade. Massachusetts has (St. 
1908, Ch. 454), and because of the statute a stockholder in 



72 ESSENTIALS OF BUSINESS LAW 

a corporation^ which conducts a monopolistic enterprise, 
cannot recover his share of profits in this illegal business 
from his fellow stockholders, who have pocketed them. 
N"ew York declares illegal and void- contracts creating a 
monopoly in the manufactnre or sale of an article in com- 
mon use. (X. Y. General Business Law §§ 340, 341). New 
Jersey exempts from this doctrine a contract by a railroad 
company, giving the exclusive right to an express company 
to solicit business on railroad premises, as such premises are 
private property. This view is held by many courts. On 
the other hand Texas courts hold that a contract binding the 
parties that one shall buy from or sell to the other exclusively 
is void as constituting a conspiracy in restraint of trade un- 
der the statute. (St. 1914, Art. 7798, subd. 1.) Washing- 
ton's constitution prohibits absolutely monopolies and trusts ; 
and it has been decided that the business of supplying ab- 
stracts of title to lands is not susceptible of being monopo- 
lized, and that an abstract company which acquires the 
business of a competitor is not within the prohibition. 

§ 4. Waxt of Mutual Assext 

108. Cases of apparent but unreal assent. — We have 
seen that a true contract involves the mutual assent of the 
parties to that which is contracted for. This assent must 
be real. If either party can show that his assent was ap- 
parent and not real he can escape from his promise, unless 
the appearance of assent was due to his own fault. 

109. nature and consequences of mistake. — Cases where 
the unreality of an apparent assent is due solely to mutual 
mistalie are quite rare. They fall within one of the two 
following classes: (1) Mistake due to the act of a third 
party. (2) Mistake as to the existence or identity of the 
subject-matter of the contract. Whenever such a mistake 
occurs there is in law no contract^ although there is in fact 
a semblance of one. 



CONTRACTS 73 

In some cases, of still rarer occurrence, tJie mistake of 
one party respecting the subject-matter, or respecting the 
identity of the other party, prevents an apparent agreement 
from taking effect as a valid contract. Perhaps the follow- 
ing illustrations will make the foregoing statement some- 
what clearer. 

110. Mistake by one party to the contract. — A livery- 
man, X, has been accustomed to buy oats from a produce- 
dealer, Y. The latter knows that the former never buys 
nor uses new oats, that he buys old oats only. X asks the 
price of oats for his own use, and Y gives him a price, 
which is the market price of old oats, and a little above the 
market price of new oats. X orders a hundred bushels at 
the specified price. Y sends new oats, which X refuses to 
keep or pay for. Is X under a contract obligation to take 
the oats and pay the price? 

If we look only at the words used by the parties there 
appears to be a valid contract for the sale and purchase of 
one hundred bushels of oats, whether new or old, at a given 
price. But, if we go back of the words to the intention of 
the parties, do we not discover that their minds never met 
upon the subject of selling and buying new oats? Of 
course, if X had never in any way advised Y that he bought 
only old oats he would have been bound to take and pay 
for the oats delivered. His mistake, undisclosed to Y, could 
not affect the latter. If, however, Y knew that X not only 
thought he was bargaining for old oats, but that X thought 
Y was offering old oats, when in fact he was offering new 
oats, then Y is in no position to insist that their minds ever 
met on the proposition to sell and buy new oats. The as- 
sent, although apparent, is unreal, and there is no valid 
contract. 

The same result follows when one party knows that the 
other is mistaken as to the form.er's identity. M buys N's 
business. 0, in ignorance of the sale, sends an order to K 



74 ESSENTIALS OP BUSINESS LAW 

for a quantity of goods. M sliips the goods without ad- 
vising that he has succeeded to N's business. is not 
bound to take or pay for the goods. As between and M 
there was no meeting of minds which could lead to a binding 
contract. 

111. Mistake due to the act of a third party. — In cases 
falling within this class the third party is generally a rogue. 
At times he assumes the worthy role of an agent for farm- 
ing implements. He accosts an unsuspecting farmer and 
induces him to contract for the purchase of a harrow^ a 
plow, a wheel-rake, or other article. A printed contract is 
presented to the farmer to sign. He writes his name under 
the printed form, and gives the matter no further thought. 
Some months later a neighboring banker calls upon him 
to pay a note for five hundred dollars, signed by him, pay- 
able to the order of the farming-implement agent and duly 
indorsed to the banker. He declares he never made any 
such note. L'pon inspection, however, he finds that the 
signature is his, and that the rogue of an agent had so 
ingeniously framed the written contract that by cutting off 
a part of it and filling in one or two blank spaces, the rem- 
nant would have the appearance of an ordinary promissory 
note. Is the farmer under a contract obligation to pay five 
hundred dollars to the banker, who has bought the note 
before due, without any intimation of the fraud, and paid 
full value for it? He is not, unless he was negligent in 
signing the paper. He never intended to sign a note. In 
the language of the courts, " the mind of the signer did not 
accompany the signature, but was fraudulently directed 
into another channel by the fraudulent conduct of the 
rogue." 

112. Mistake as to the existence of the subject-matter. 
— An illustration of this sort of mistake is afforded by the 
following case : A offers to sell, at a specified price, certain 
bales of cotton which B had seen in A's warehouse, and B 



CONTRACTS 75 

accepts the offer. It turns out that the warehouse and cot- 
ton had been burned up before the agreement was reached. 
Here is no contract. They were treating for the sale and 
purchase of a particular lot of goods; when these went up 
in smoke the possibility of a contract went also. There can 
not be a contract for the purchase and sale of what has 
passed into nothingness. 

113. Mistake as to the identity of the subject-matter. 
— This is to be distinguished from a mistake as to the 
quality, properties, or value of a particular object. The two 
following cases bring out the distinction very clearly: 

In the first case, M, the owner of a coin worth ten dol- 
lars, passed it to N by mistake for a half-dollar, and N, 
by a like mistake, passed it to for a half-dollar. M was 
allowed to regain the coin from upon tendering him a 
half-dollar. There was not mutual assent between M and 
N, nor between IST and to an agreement that this particu- 
lar coin should be transferred as a fifty-cent piece. In the 
second case, X found a queer stone which he showed to 
Y, who offered him a dollar for it. X accepted the offer, 
received the money, and delivered the stone. It turned out 
to be worth several hundred dollars. A valid contract was 
made, and X can not recover the stone. 

In the case of the ten-dollar coin the parties were con- 
tracting for a fifty-cent piece, and mistakenly thought this 
coin was one, when it was not. In the case of the stone, 
they were contracting for that particular article and no 
other. There was no mistake as to the subject-matter of 
their agreement. Their assent was mutual and unequivocal. 
That one or both misjudged the value of the stone did not 
prevent the formation of a valid and binding contract, in 
the absence of fraud on the part of the buyer. 

114. Nature and consequences of misrepresentation. — 
This word is used frequently to describe a fraudulent or 
dishonest representation, but as a technical legal term it sig- 



76 ESSENTIALS OF BUSINESS LAW 

nifies an innocent misstatement of some matter of fact, by 
one party to a contract. It differs from mistake^ which we 
have just discussed^ botli in its character and its conse- 
quences. It does not go to the very root of the agreement, 
but is concerned with sometliing which is preliminary or 
collateral to it. As a rule, therefore, it does not prevent the 
formation of a contract as a mistake does, nor does it ren- 
der it voidable, as, we shall see presently, fraud does. 

The following is a typical case of misrepresentation : A 
had a number of horses which he was about to sell at auc- 
tion. The day before the sale B was examining one of 
them, when A said to him : " You have nothing to look for. 
I assure you he is perfectly sound in every respect." B re- 
plied, " If you say so, I am satisfied," and desisted from 
his examination. On the next day he bought the horse at 
auction, and the animal turned out to be unsound. Before 
the bidding began at the auction, A announced that the 
horses would be sold without any warranty of soundness, 
and that bidders must trust to their own examination and 
judgment. When B discovered the horse was unsound he 
tendered him back to A and demanded the price he had 
paid, on the ground that A's misstatement, though made 
innocently, rendered the contract voidable. But it was held 
that B was bound by the contract. A's misstatement was 
made during the preliminary negotiations, and formed no 
part of the contract of sale. The announcement by A at 
the opening of the auction gave B fair notice that the talk 
of the previous day was not to be a part of the contract. 

115. Misrepresentation may be made a term of the con- 
tract. — In the case just considered, if B had informed A 
before bidding on the horse that he would not buy the horse 
nor keep him unless he was sound, and A had replied, " I 
assure you he is sound in every respect," then this mis- 
statement, though innocent, would have been a fundamental 
term of the contract, and B would have had the right to 



CONTRACTS 77 

say to A : " My contract with you was not for this horse, 
whether sound or unsound, but for this horse provided he 
was sound. As he is not sound, the bottom has fallen out 
of the contract. You must take back the horse and pay back 
the price." 

116. Practical wisdom of this rule. — The rule, that in- 
nocent misrepresentations shall not affect a contract unless 
they form a part of its terms, has been applauded by an emi- 
nent writer as " an instance of the practical wisdom which 
marks our law of contract. The process of coming to an 
agreement is generally surrounded by a fringe of statement 
and discussion; and the courts might find their time occu- 
pied in endless questions of fact, if it were permitted to a 
man to repudiate his contract, or bring an action for the 
breach of it upon the strength of words used in conversation 
preceding the agreement.'" 

117. Fraud: meaning of, in law of contracts. — Fraud, 
as the term is used in the law of contracts, may be defined 
as a wilful or reckless misstatement of fact hy one party for 
the purpose of inducing and actually inducing the other 
party to assent to the terms of the contract. It differs from 
mistake, which we considered on a previous page, in that 
the error is not mutual ; only the defrauded party is mis- 
taken. It differs from misrepresentation in that the mis- 
statement is not innocent but is culpable. 

We have used the word culpable rather than wilful or 
conscious because it is well settled that a misstatement 
made recklessly has the same legal consequences as one. made 
wilfully. Here is an illustration : A is anxious to sell cer- 
tain land. He has never seen it, and does not know its 
condition. To induce B to buy it he states positively that 
it has fine buildings, is well watered, and produces large 
crops. He hopes all this is true, but he knows that he 
has no information about it, and as a matter of fact there 
are neither buildings nor water on the premises, and the 



78 ESSENTIALS OF BUSINESS LAW 

land is nnproductiTe. Surely such conduct is indefensible 
m morals^ and the law declares that, if it induces B to buy 
the land, it is fraudulent. 

118. Fraud involves the idea of active misconduct. — 
The reader is not to understand, however, that the rule of 
law on this subject is as broad as the rule of ideal morality. 
A man is not required by the law to disclose to a party with 
whom he is negotiating for a contract, all the information 
which he has on the subject. Each party must take care of 
himself. The golden rule is so far above the accepted code 
of business men that courts would be quixotic in attempt- 
ing to apply it to business dealings. Mere failure, then, to 
disclose the truth is not fraud. 

This is well illustrated by a decision of the United 
States Supreme Court, rendered many years ago by Chief- 
Justice Marshall. The case grew out of a sale of tobacco 
at the close of our second war with Great Britain. When 
making the contract the buyer knew that peace had been 
concluded between the countries, and that the price of to- 
bacco would advance at once from thirty to fifty per cent. 
The seller was ignorant of the conclusion of peace, and the 
buyer knew he was ignorant of the fact; yet the court de- 
clared that the bu3^er was under no legal duty to tell him 
anything ; that if the buyer did not say or do anything tend- 
ing to impose upon the seller there was no fraud. In other 
words, there can not be a fraud, in the legal sense of that 
term, without something in the nature of active misconduct. 

119, Non-disclosure of the truth in connection with 
other circumstances. — A person who takes advantage of the 
ignorance of another, .as in the tobacco case just referred 
to, is in a perilous situation. A very slight misstep may 
plunge him into the abyss of fraud. Let us refer to the 
tobacco case again for illustration of our meaning. It ap- 
peared,' in this case, that the buyer had been negotiating 
with the seller for the tobacco before the news of peace 



CONTRACTS Y9 

had been received, and that when the buyer renewed the 
negotiations, after getting the news, the seller asked if 
there was any news calculated to advance the price; that 
the buyer did not answer the question, and the seller did 
not insist on an answer. Upon these facts, the judge, be- 
fore whom the case was tried, charged the jury that there 
was no fraud on the part of the buyer. But the Supreme 
Court held that it was not absolutely certain that no im- 
position had been practised by the buyer, and that, whether 
the non-disclosure of the truth, taken in connection with 
the other circumstances, amounted to fraud, was a question 
for the jury. 

It should be borne in mind, therefore, that the line 
which separates non-disclosure from suppression of truth is 
often dim and shadowy, and that a man who attempts to 
make a sharp bargain and still keep on the windy side of 
the law needs ^o have all his wits about him. " He who 
would sup with ihe devil must have a long spoon." . 

It is to be borne in mind, also, that one may perpetrate 
a fraud upon another, although telling nothing but the 
truth. His non-disclosure of other things may so alter the 
effect of what he actually says as to produce a false and 
misleading impression. It is the case of " a lie which is 
half the truth " ; and while the law does not declare it the 
*^ blackest of lies," it does adjudge it a fraud. For ex- 
ample, a man who wished to be trusted for a bill of goods, 
was asked by the seller " how he stood." He gave a truth- 
ful statement of the property he owned, but said nothing of 
what he ow^d, although his debts nearly equaled the value 
of his property. " To tell half a truth," said the court, 
'^ is, in such a case, to conceal the other half. Concealment 
of this kind amounts to a false representation." 

120. Acts may speak louder than words. — Fraud may be 
practised without the use of speech. A manufacturer or 
dealer who paints a step-ladder for the purpose of conceal- 



80 ESSENTIALS OF BUSINESS LAW 

ing a defect in tlie wood, or who plugs a hole in a gun- 
barrel to prevent its discovery, and sells the article to one 
who is misled by its safe appearance, defrauds the buyer 
as truly as though he had declared in the clearest terms that 
the ladder or the gun was without defect and safe for use. 

121. Misstatement of fact, not of opinion. — In our defi- 
nition of fraud it was intimated that the misrepresentation 
must be one with respect to a matter of fact, as distin- 
guished from a matter of opinion. The reason for this is 
that the law does not undertake to help a man who does 
not help himself — does not attempt to save him from the 
natural consequences of his own folly. 

A offers his horse for sale and asserts it is worth five 
hundred dollars. Is he stating a fact or expressing an 
opinion? Clearly, the latter. How would the ordinary 
horse-buyer treat such a statement ? Why, simply as a piece 
of " seller's talk," no more to be relied on than the pathetic 
and voluble appeals of an auctioneer to the b3'standers not 
to force him to knock down his wares at such " a perfectly 
ruinous rate.'' But suppose A declares that the horse has 
trotted a mile in two minutes. Here, certainh', is a state- 
ment of fact; one, too, which the most experienced and 
shrewdest horse-dealer would consider of importance when 
deciding whether to buy the horse. If B buys, relying on 
the truth of that statement, and the horse has never trotted 
faster than a mile in three minutes, he has been defrauded. 

122. Misstatement of fact, which buyer ought not to 
rely on. — According to some authorities, a false statement 
of what the seller paid for the article is one which the buyer 
ought not to rely on. Consequently, if he does permit it to 
induce him to buy, he has only himself to blame ; he can 
not hold the seller for fraud. The courts taking this view 
follow a decision of Lord Mansfield, in which that great 
judge declared that a false statement as to what the seller 
bad paid for an article was such as was made "by every 



CONTRACTS 81 

seller every day, who tells every falsehood he can to induce 
a purchaser to purchase." 

This doctrine has been repudiated in England and in 
many of our States. It is a survival from an age long past, 
when Hermes, the god of markets, was also the god of 
liars and of thieves. The development of market usages and 
law has been away from the patronage of such a divinity, 
and in the direction of good faith, fair dealing, and per- 
sonal probity. A state of millennium has not yet been 
reached, and the law still tolerates a good deal of lying on 
the part of sellers, but it tolerates far less than it did in 
Lord Mansfield's time. 

123. False statement need not be the sole inducement. 
— Not only must the false representation be one of fact, and 
made with the intention that it should be acted on by the 
other party, but it must accomplish its purpose ; it must 
deceive the other party and lead him to act as he would not 
have acted had it not been made. It is not necessary, how- 
ever, that the falsehood be the sole inducement to his 
action. It is enough that it is one of the inducements. 
Accordingly, if A falsely represents that the carpets, cover- 
ing a number of rooms as well as the hall and stairs in 
his house, contain about nine hundred yards when he knows 
they contain only five hundred, he is liable in fraud to a 
buyer who believes the statement, although the latter goes 
through the house and makes a rough estimate of the 
floor space. It is no defense for one who intended to de- 
ceive and who did deceive another by a false statement of 
fact, that the victim might have discovered the falsity had 
he been sufficiently suspicious and active. 

124. The rights of the defrauded party. — The conse- 
quences of fraud are quite different from those of mistake 
or of innocent misrepresentation. Fraud renders the con- 
tract voidable hy the dupe hut not iy the deceiver. Cer- 
tainly the victim can say that he did not consent to the 



82 ESSENTIALS OF BUSINESS LAW 

terms of the contract as it was made. Take the case of the 
carpets^ referred to in the last paragraph. The buyer con- 
sented to the purchase of nine hundred yards of carpets for 
a specified sum ; he never consented to the payment of that 
sum for five hundred yards. 

But while the defrauded party is entitled to avoid the 
contract^ and recover anything which he has paid under it, 
the law does not limit him to this course. It permits him to 
affirm the contract, and to sue the defrauding party for 
damages which the fraud has caused. 

135. Disaffirmance must be made promptly. — If he 
wishes to avoid the contract he should act promptly upon 
finding that he has been deceived. The acceptance of any 
benefit under the contract, after the fraud is known to him, 
will preclude him from avoiding it thereafter. He will lose 
this right, also, if he so deals with the subject-matter of the 
contract or permits the other party so to deal with it, that 
upon a rescission of the contract, the defrauded party can 
not be put in the position he occupied before the contract 
was made. 

Again, the right will be lost when innocent third parties 
have acquired an interest for value under the contract. For 
example : A sells goods to B, relying on B's false statement 
that he is worth a thousand dollars over all his debts, when, 
in fact, he is insolvent. If C buys the goods of B, and 
pays for them, A can not thereafter avoid his sale to B 
and reclaim the goods. Here, as in cases where he elects 
to affirm the contract, his only remedy is an action for 
damages. 

126. Duress. Its various forms and consequences. — Th9 
most extreme form of duress is that of complete physical 
compulsion, as when one seizes the hand of another and 
guides it while it writes or signs a document. A contract 
executed under such circumstances is absolutely void. It 
has not even the apparent consent of the one wdiose name is 



CONTRACTS 83 

signed. The signature is not his act at all, but the act of 
the one who guided the hand. 

Next to this is the duress which consists in coercing a 
person to do an act or to' make a promise by threatening his 
life if he does not. Here he has the choice of doing the 
act or making the promise on the one hand, or, on the other, 
of losing his life. He chooses to do the act or to make the 
promise. Hence the act or the promise is not void, as is 
the case of overpowering physical compulsion ; but as his 
consent was not freely given, the act or promise is voidable. 
If a person makes a will or a conveyance of property, or en- 
ters into a contract, under such duress, he may avoid it as 
against the coercer. 

127. Duress by threats of injury to person or property. 
— The same rule applies to acts done or contracts made 
when one is threatened with mayhem ^ — that is, with the 
loss of a bodily member which is useful in fighting, such as 
an arm, a leg, an eye, or a front tooth. Mere threats of 
assault and battery, though made by a stronger and brutal 
man, and inspiring a well-grounded fear of personal injury, 
did not amount to duress at early common law, nor did 
threats of destroying one's house or goods, nor of wrong- 
fully detaining them. 

Blackstone supports this doctrine on the ground that if 
the threat is carried into effect the injured party may have 
satisfaction by recovering equivalent damages, while no 
suitable atonement can be made for the loss of life or limb. 
A better view is presented by Judge Metcalf in his work 
on Contracts. This doctrine, in his opinion, is character- 
istic of the age in which it had its oris^in, an age in which 
personal valor in defending one's person and possessions was 
encouraged, and resort to the law for the redress of assault 
and battery or attacks, upon property was discouraged. 

* Originally written "maiheme"; ancient form for "maim." 



84 ESSENTIALS OE BUSINESS LAW 

The tendency in this country is to enlarge the scope of 
duress, and to give relief from contracts entered into under 
threats of battery or of destruction of goods. Even in Eng- 
land a person who pays illegal exactions in order to save 
his property from destruction, or to get it from one im- 
properly refusing to surrender it, is allowed to recover 
such payments, on the ground that they were made without 
legal consideration. 

128. Duress by threats of imprisonment. — Still another 
form of duress is practised by threats of imprisonment. 
Here, again, the early common law limited narrowly the 
operation of duress. The imprisonment threatened must 
have been unlawful; a person making a contract, under 
threats that he would be imprisoned for an offense which 
he had actually committed, could obtain no relief therefrom. 

At present, however, the prevailing view in this country 
is, that although one is liable to arrest and imprisonment, 
if the threat to imprison him is made, not for the protec- 
tion of the public and the punishment of the crime, but 
to overcome his will and force him to enter into a con- 
tract which he would not have made but for this, the con- 
tract is voidable by him. 

129. Threats against the contracting* party's relatives. 
— While it is the general rule that the threats of violence 
or imprisonment must be directed against the contracting 
party in order to operate as legal duress, exception is made 
in case of threats against the husband or wife, the parent, 
or child of such party. The exception rests upon the ten- 
derness of the relationship between the person threatened 
and the one contracting. Threats to kill or to maim or to 
imprison a husband, a wife, a parent, or a child are ordi- 
narily as coercive upon one's will as threats against one's 
own person. 

130. Duress must be caused or be adopted by the other 
party to the contract. — In order that one party to a con- 



CONTRACTS 85 

tract may avoid it on the ground of duress, he must show 
that the other party is legally responsible for the coercion. 
It is not necessary, however, to prove that the latter actually 
and in person practised the duress. It is enough that he 
procured it ; nay, even that he adopted or took advantage of 
it, with knowledge that the contract had been obtained by 
means of it. Such adoption or ratification makes him 
liable, precisely as if the coercive act had been expressly 
commanded by him and done under his very eye. 

131. Undue influence defined. — Undue influence has 
been defined as consisting: (1) In the use, by one in whom 
confidence is reposed by another, or who holds a real or ap- 
parent authority over him, of such confidence or authority 
for the purpose of obtaining an unfair advantage to himself. 
(2) In taking an unfair advantage of another's weakness 
of mind. (3) In taking a grossly oppressive and unfair 
advantage of another's necessities or distress. 

Examples of the first class are afforded by certain trans- 
actions between attorney and client; between parent or 
guardian and child or Avard ; between a spiritual adviser and 
one of his flock; and between physician and patient, by 
which the dominant party obtains a benefit or advantage 
over the other. The law looks with suspicion upon every 
such transaction, and compels the attorney, or the parent, 
or the guardian, or the spiritual adviser or the physician to 
show that it was fair and honest ; that the confidence re- 
posed in him or the authority exercisable by him was not 
abused, but that the other party was fully advised as to his 
rights and allowed to choose and to act freely for himself. 

132. Relation of undue influence to fraud. — All cases 
of undue influence are, in a sense, cases of fraud, and those 
falling within the second and third classes enumerated 
above are generally characterized by the courts as fraudu- 
lent. In this connection, however, " fraud " has a wider and 
less precise signification than that given to it a few pages 



86 ESSE^;TIALS OF BUSINESS LAW 

back. AYe then learned that false statements of opinion 
as to the character or conduct of third persons, or as to the 
value of property, or as to the advantages of a bargain, 
do not amount to fraud in its narrow^, precise, common-law 
sense. 

Such statements, however, are often very effective in un- 
duly intluencing young, inexperienced, weak-minded, or ne- 
cessitous persons, and hence are unfair and fraudulent to- 
ward them. " Fraud,*" said Lord Hardwicke a century and 
a half ago, '^ does not here mean deceit or circumvention; 
it means an unconscientious use of power arising out of the 
circumstances and conditions of the case." In the language 
of another judge, ^'Whenever influence is acquired and 
aJjused, irlierevcr confidence is reposed and hetrayedf' we 
have a case of undue influence. 

133. Rights of the victim of undue influence. — The 
effects of undue influence upon a contract, obtained by its 
exercise, are quite similar to those of fraud, but not pre- 
cisely the same. The contract is voidable at the option of 
the victim, but binding on the other party. Beceiving bene- 
fits under the contract, however, with full knowledge that 
he has been victimized, will not preclude him from rescind- 
ing thereafter. Xot until his will has thrown off the domi- 
nant influence which unduly controlled it. and has acquired 
the power to con-ent freely to the contract, is he held to be 
in a position to affirm it. 

§ 5. Peesoxs Affected by a Coxtract 

134. Rights and obligations under a contract are gen- 
erally limited to the parties. — Having learned how a valid 
contract is made, let us now consider rhe parties who are 
affected by it. 

TVe have seen that a true contract requires the mutual 
assent of the parties to its terms. It would seem to follow 



CONTRACTS 87 

from this that only the parties to a contract can be bound 
by it or entitled under it. A contracts to work for B a 
year for a thousand dollars. A has come under obligations 
to B and B has come under obligations to A, but neither 
one has assented to be bound by the contract to any other 
person. Accordingly, C can not claim A's services under 
this contract, even with B's assent, for A has not consented 
to 'work for C. So, too, D can not force B to accept his 
services under this contract in lieu of A's, although A may 
have requested D to act in his place. 

135. Substitution of third parties may be provided foi 
in the contract. — ^.Of course A and B are at liberty to stipu- 
late in their contract that either may substitute another in 
his place. ' Even without any such stipulation, the usages 
of business or the circumstances of the case may show that 
the parties intended to give this right of substitution. For 
example, A contracts to build a house for B. The latter 
knows that A can not do the work with his own hands, but 
that he is accustomed to hire workmen to do much of the 
manual labor, and to sublet parts of the job to masons, 
plumbers, and others. By entering into the contract with 
knowledge of such a usage, B impliedly consents to all 
that the usage permits A to do. 

Even in such a case, however, B's obligation of payment 
under the contract is limited to A. A's laborers or sub- 
contractors must look to him for their pay. They have 
no contract with B. He has assented, indeed, to A's em- 
ploying others upon the job, but he has not assented to the 
splitting up of his liability to A among fifty or a hundred 
of A's workmen and subcontractors. If A gives to a la- 
borer an order on B, the latter is not bound to honor it, 
even though he is owing A a much larger sum. He has a 
right to say : " I have agreed to pay B certain sums at cer- 
tain tinjGS, J- 3m ready to perform that agreement, but I 
decline to pay in driblets to Tom, Dick, and Harry." He 



88 ESSENTIALS OP BUSINESS LAW 

may be as unaccommodating as Shylock, but, like Shylock, 
he has the right to stand upon what is " nominated in the 
bond," and to say " the law allows it." 

The extent to which this right may be affected by A's 
assignment of his interest in the contract will be consid- 
ered presently. 

136. Interference by outsiders with the obligations of 
contract. — While the parties to a contract and they only 
can be made subject to its obligations, outsiders are not 
entirely free to interfere with its performance. 

Some authorities go so far, indeed, as to lay down the 
rule that everybody is under a duty to respect the contrac- 
tual tie ; that if any third person knowingly interferes with 
it — for example, if he persuades either party to break his 
contract — he makes himself liable to pay damages to the 
contracting party injured by such interference. 

Other authorities repudiate so broad a rule, and de- 
clare that the duty which rests upon outsiders is only to 
refrain from interfering with the performance of the con- 
tract in certain ways. They must not employ unlawful 
means, such as threats, violence, falsehood, or deception, 
to induce a party to break his contract, but they are not 
under an absolute duty to respect the contractual tie. The 
chief reason in support of this view is that the person who 
breaks his contract is liable to the other contracting party 
in damages ; and that if he acts freely in breaking it, the 
legal as well as the moral re^^p^n-ibilitv for his act is 
upon himself, and can not logically bo extended to others. 

A recent decision of the English House of Lords appears 
to adopt this view, and the courts of last resort in several of 
our States are fully committed to it, while those of other 
States and the Federal courts prefer the broader rule first 
given. The topic, however, belongs to the law of torts, or 
civil wrongs, rather than to that of contracts, and will not be 
further discussed here. 



CONTRACTS 89 

137. Rights of third persons under a contract. — As 

stated above, the right to enforce a contract is limited 
generally to the parties. Although A has promised B, foi- 
a valuable consideration, to pay money or transfer property 
to C, the outsider C is not entitled at common law to en- 
force this promise against A. This appears sound upon 
principle, for A has never consented to be bound to C. Such 
is still the rule in England. 

In this country various exceptions to it are recognized, 
the chief of which are the following: (1) A delivers prop- 
erty to B upon B's promise to turn it over to C, or to sell 
it and turn over the proceeds to C. If B fails to use the 
property as he contracted with A to do, C can sue him for 
the property or the proceeds. (2) Again, A is owing G 
a debt, and sells property to B upon his promising to pay 
the purchase price to C, in satisfaction, to that extent, of 
his debt to C. If B does not so pay, C can sue him for 
the price. (3) Still again, A sells a farm to B, who as- 
sumes a mortgage of one thousand dollars on it previously 
given by A to C, and the thousand dollars is deducted from 
the purchase price. If B does not pay the mortgage debt 
C can sue him therefor. 

138. Reasons for the American exceptions. — In all these 
cases, it will be observed, there are special circumstances, 
which give C an interest in enforcing the contract, over and 
above the contract itself. Moreover, to permit C to sue B 
avoids one lawsuit, for if C could not sue B on his default, 
he would sue A, and then A would proceed to sue B. Ac- 
cordingly, these exceptions are to be supported, if at all, 
upon the grounds (1) that they give the right of action 
to the party who, in most instances, is chiefly interested in 
enforcing the contract, and (2) they avoid a multiplicity of 
lawsuits. 



90 ESSENTIALS OP BUSINESS LAW 

§ 6. AsSIGIs^MEXT OF COXTRACT 

139. Liabilities under a contract not assignable. — The 

reason for this rule is very plain. A borrows a thousand 
dollars of B and promises to repay it three months there- 
after. Clearly, B has assented to the contract because of 
his confidence in the character and financial responsibility 
of A. No one can be substituted for A without B's con- 
sent. 

To be sure, in case of A's death, or of his bankruptcy — ■ 
which is often called a business man's commercial death — 
B is compelled to look to A's personal representative (his 
executor or administrator) or to his trustee in bankruptcy 
for payment; but that is because it has become impossible 
for A to personally discharge his contract liabilities. 

140. The assignability of rights under a contract. — At 
common law even the rights under a contract could not 
be assigned. Various explanations of this rule have been 
offered. Lord Coke attributed it to the "^ wisdom and policy 
of the founders of our law '' in discouraging litigation, and 
preventing wealthy people from buying up claims for the 
purpose of oppressing the poor. The true explanation, 
however, seems to be that it " was a logical consequence of 
the primitive view of a contract as creating a strictly per- 
sonal obligation between the creditor and debtor.'' 

As our legal system has developed and improved, this 
rule has been modified from time to time. First, the as- 
signee was alloiued to sue on the contract, but in the name 
of the assignor. On the records of the court, therefore, the 
suit would still be between the parties to the contract. The 
next step was taken by courts of equity, which permitted 
the assignee to sue in his own name. The third and latest 
step was taken by the enactment of statutes, which grant 
the right to an assignee of a contract to sue at law in his 
oiun name. Thus has the primitive idea of a contract, as 



CONTRACTS 9 J 

creating strictly personal obligations between the parties, 
been superseded by the view that a creditor's right under a 
contract is propert}^, which he may dispose of as he may of 
a horse or a hat. It is simply an example of common-law 
rules and conceptions undergoing a change so as to suit the 
needs of business. Suppose a merchant has sold thousands 
of dollars' worth of goods to various customers on a credit 
of six months. He needs to buy new goods. His money is 
locked up in these accounts against his customers. If he can 
assign the accounts to a bank he can get the money he 
needs; if he can not assign them he must go without the 
money. Surely the common law would not be the flexible 
and expanding system which it was declared to be in our 
second chapter if it could not modify the narrow rule and 
views of Lord Coke's time and adapt itself to the needs of 
ours. 

141. Notice of assignment should be given. — As soon 
as an assignment of a contract right is made^ the assignee 
should give notice thereof to the debtor. The reason for 
this rule is not hard to find. If the debtor is not notified 
of an assignment he is justified in supposing that the 
original creditor still owns the claim, and that payment to 
him will satisfy the debt. Of course if the creditor is hon- 
est he will refuse to take payment from the debtor in case 
the claim has been assigned, and will direct him to the as- 
signee. Unfortunately, all creditors are not honest, and it 
often happens that an assignor takes payment from the 
debtor, fails to turn it over to his assignee, becomes in- 
solvent or absconds, and thus the assignee loses all that he 
paid for the claim. 

142. Assignee is subject to defenses against his assignor. 
— Not only must the assignee take care that the debtor 
is notified of the assignment, but he receives the claim sub- 
ject to any defenses which the debtor could have urged 
against it in the hands of the assignor. For example, A 



92 ESSENTIALS OF BUSINESS LAW 

orders a car-load of sound and marketable potatoes from B 
at fifty cents a bushel. The latter ships unsound and un- 
marketable potatoes and assigns to C his claim for the price. 
C can sue on that claim in his own name, but A can defend 
on the ground that the potatoes were not such as he ordered, 
precisely as he could had the suit been brought by B. In 
other words, the assignee steps into the shoes of the as- 
signor; he takes such title as his assignor had and no 
better. It is not uncommon, therefore, for the person who 
is asked to buy a claim to get a written statement from the 
debtor that he has no defenses to it. 

When we come to the chapter on Negotiable Instru- 
ments we shall find that the law merchant secures to the 
hona fide transferee of such contracts a title free from most 
defenses against the transferors. 

143. Assignment by operation of law. — Thus far we have 
been considering assignments voluntarily made by parties 
to contracts; but oftentimes contract rights or liabilities 
are assigned by operation of law. A party to a contract 
dies. The law transfers his contract rights, and to some 
extent, as already noted, his liabilities to his personal repre- 
sentative — that is, to the executor of his will, or the ad- 
ministrator appointed by the surrogate or similar officer 
to settle his estate. This has been the rule of English law 
from a very early period. Formerly marriage transferred 
to the busbar d all the contract rights and liabilities of the 
wife, but this form of transfer by operation of law has been 
abolished in England and in most of our States by statute. 
Still another method of transferring contract rights and 
liabilities by operation of law will be discussed in the 
chapter on Bankruptcy. 

The law does not transfer to personal representatives 
either rights or liabilities under contracts for personal skill 
or services, or those whose breach causes a personal as dis- 
tinguished from a property loss, e.g., contracts to marry. 



CONTRACTS 93 

§ 7. Discharge of Contract 

144. Executory contracts may be discharged by mutual 
consent. — So long as a contract remains executory — that is, 
unperformed on botli sides, the parties may discharge it by 
mutual consent. For example, A contracts to build a house 
for B for five thousand dollars. Before A has done any- 
thing or B has paid anything they mutually agree to can- 
cel the contract. Surely, as the obligation sprang from the 
mutual promises, it must vanish with their withdrawal. 

145. Contracts executed by one party can be discharged 
only by performance or release. — But suppose A has built 
the house and B has paid nothing or only a part of the 
price, will a new agreement between them, absolving B 
from further liability under the contract, discharge it? 
We have only to revert to the doctrine of consideration to 
discover that the question must be answered in the nega- 
tive. B sustains no detriment, gives up no right in ex- 
change for A's new promise. After A has performed his 
contract the only way in which B can be discharged from 
its obligation is by performance on his part or by obtain- 
ing a release under seal from A. Such a release may be in 
the following form : 

Know All Men ly these Presents, That I, A, of Buffalo, N. Y., 
for a valuable consideration, do hereby release and discharge B, of 
Cleveland, Ohio, from every claim or demand of any kind or nature. 

In Witness Whereof, I have hereunto set my hand and seal this 
Tenth day of October, 1901. 

(Signature.) [Seal.] 

Under modern statutes in many of our States, as we 
have seen, such a release would not be an absolute dis- 
charge unless a consideration was in fact received. At 
common law the seal, it will be remembered, dispensed en- 
tirely with proof of consideration; or, as it is sometimes 



94 ESSENTIALS OF BUSINESS LAW 

put, the seal was conclusive evidence of consideration. The 
statutes above referred to declare the seal is prima facie 
evidence of consideration — that is, the seal authorizes the 
presumption that a consideration was given, but that pre- 
sumption may be overcome by evidence that none was 
given. 

146. Discharge by substitution of new contract. Nova- 
tion. — Another way of discharging a contract by the mutual 
consent of the parties is to substitute a new contract for the 
original one. Suppose, after A's agreement to build a 
house for B for five thousand dollars, B decides to change 
his plans and erect a smaller house. A assents to the 
change, and agrees to build this house for four thousand 
dollars. The original contract is discharged and the new 
one is substituted for it. 

So a contract may be discharged by the substitution of 
a new one having different parties. X and Y as partners 
are owing Z five hundred dollars for goods purchased. The 
partnership is dissolved. X buys out Y, agrees to pay the 
firm debts, and Z assents to accept X as his debtor instead 
of the firm. The old contract is discharged by the substi- 
tution of a new one in its place, to which Y is not a party. 
This is often spoken of as a discharge by novation. 

147. A contract may be discharged by the happening of 
a stipulated event. — Xot infrequently a contract contains 
a provision that it shall cease to be binding at the option 
of one of the parties, or upon the happening of a certain 
event. An example of the former is the sale of a horse upon 
condition that the buyer may return him and receive back 
the purchase money within a fixed period if the horse 
does not suit him. An ordinary insurance policy is an 
example of the latter. It provides, among other things, 
that if the insured premises are used so as to, increase the 
risk, or if they remain unoccupied for more than a specified 
number of days, the policy shall be void. 



CONTRACTS 95 

148. Discharge by performance. — The commonest meth- 
od of discharging a contract is that of performance by both 
parties. Of course, either party is discharged from his 
obligation as soon as he has performed what he has agreed 
to do, but performance by one party only does not discharge 
the contract. A sells and delivers an article to B. If it 
conforms to the contract A's obligation is at end, but B 
remains bound until he pays the price. On the other hand, 
B may pay for the article in advance of receiving it, and 
thus discharge his contract liability, while A remains bound 
by his. 

Money is the ordinary medium of payment, but a con- 
tract may provide for payment by negotiable paper, by the 
transfer of land, or of a chattel. Even when the contract 
calls for payment in money the creditor may waive this 
stipulation and accept negotiable paper, a horse, a wagon, 
or any other article. When, however, a debtor is allowed 
to give his promissory note or check, instead of cash, his 
contract obligation is not discharged unless the creditor 
agrees to accept the note or check as absolute payment. 
It is true this agreement need not be in express words. It 
may be implied from the circumstances of the case. But 
in the absence of an agreement, either express or implied, 
the note or check operates only to suspend the debtor's obli- 
gation. If the note is not paid when it falls due, or the check 
when it is duly presented at the bank, the creditor may sue 
the debtor on the original contract. 

149. Tender of performance. — At times one party to a 
contract refuses to allow the other to perform. In such a 
case the latter may offer to do luhat the contract hinds him 
to do — may tender performance. If his obligation is to do 
an act other than the payment of money, his offer to do it, 
made at the agreed time and place, although the other 
party refuses the tender, discharges him from further 
liability. Tf his obligation is to pay money, his tender of 



96 ESSENTIALS OF BUSINESS LAW 

performance at the proper time and place does not dis- 
charge; it only relieves him from interest and the costs 
of a suit thereafter brought by the creditor. A tender of 
payment, even to have this effect, must be unconditional; 
must be of the exact sum, and must be made with money 
which is a legal tender for debts, in the place where tender 
is duly made. 

150. Legal-tender money of the United States. — In this 
country the Federal Constitution and statutes regulate the 
subject of legal tender. By xArticle I, section 10, of the 
Constitution, the States are prohibited from coining money 
and from making anything but gold and silver coin a tender 
in payment of debts. The United States statutes provide 
for the coinage of various gold, silver, and minor coins, and 
for the issue of paper money. The gold coins comprise a 
quarter-eagle, or two-and-a-half-dollar piece, a half-eagle, 
an eagle, and a double eagle. The silver coins are the dol- 
lar, the half-dollar, the quarter-dollar, and the dime. The 
minor coins are the five-cent piece and the penny. 

Gold coins of the United States, the United States notes, 
commonly known as greenbacks, and certain demand 
Treasury notes, are a legal tender in the payment of all 
debts, and silver dollars " for all debts, except where other- 
wise expressly stipulated in the contract." The silver 
coins below the dollar are legal tender for an amount not 
exceeding ten dollars in any one payment ; while the minor 
coins are a legal tender for an amount not exceeding twenty- 
five cents in any one payment. 

151. Consequences of breach, of contract by one party.— 
A person who breaks his contract does not thereby discharge 
himself from its obligation, although his breach may dis- 
charge the other party from further liability under the con- 
tract. In some cases a court of equity will compel the con- 
tract-breaker to specifically perform his contract. As a rule 
this will be done when, and only when, the recovery of money 



CONTRACTS 97 

damages will not be an adequate remedy. If A contracts to 
sell his horse to B, and then breaks his contract, B can 
not force A to specifically perform, -by turning over the 
horse to B and receiving his money. It is a case, the courts 
say, where B can be compensated for the breach by money 
damages. With the money he can buy some other horse. 
If, however, the thing contracted for is not such as can be 
duplicated in the market, a court of equity will compel the 
seller to give title to the thing to the buyer. A house, f arm^ 
or other real property generally falls within this class. So, 
it has been held, does " a silver tobacco-box, adorned with 
several engravings of public transactions and heads of dis- 
tinguished persons," or " a china jar of unusual beauty, 
rarity, and distinction," or a patented article. 

152. When does a breach by one party discharge the 
other? — While the contract-breaker remains liable under 
the contract, his breach may be of such a character as to 
discharge the other party entirely. Whether it will have 
this effect or not generally depends upon the question 
whether it is of a fundamental term of the contract ; or, as 
it is sometimes said, whether it goes to the very root of the 
contract. 

This is admirably illustrated by two cases, one decided 
by the Court of Queen's Bench in England, the other by the 
Supreme Court of the United States. 

153. Breach of a term, which is not of vital importance. 
— The plaintiff in the English case, a professional singer, 
had contracted with the defendant, director of the Royal 
Italian Opera in London, to sing in concerts and opera for 
a stated period. One of the provisions of the contract 
bound the plaintiff " to be in London without fail six days 
before the commencement of his engagement, for the pur- 
pose of rehearsals." He did not reach London until two 
days before the commencement of his engagement, and de- 
fendant insisted that this breach discharged him from the 



98 ESSENTIALS OP BUSINESS LAW 

contract, and he refused to employ or pay the plaintiff. The 
court, however, decided against the defendant. It examined 
the contract carefully, and, finding no express statement by 
the parties that this provision was of vital importance, de- 
clared that it must " look to the whole contract, and see 
whether the particular stipulation goes to the root of the 
matter, so that a failure to perform it would render the per- 
formance of the rest of the contract by the plaintiff a thing 
different in substance from ivhat the defendant had stipu- 
lated for; or whether it merely partially affects it, and may 
be compensated for in damages." Apptying this principle to 
the contract in suit, the court held that the provision as to 
the time of arrival in London was not of vital importance — 
did not go to the root of the matter. 

Had the plaintiff failed to be present on the opening 
night of the opera season, his breach might have gone to the 
root of the contract, and discharged the defendant. It cer- 
tainly would have had that effect, had it compelled defend- 
ant to engage some other singer in plaintiff's place for the 
season, or had it forced him to withdraw an opera which 
had been advertised for that evening, and thus to lose heav- 
ily in money and reputation. 

154. Breach of a vital or fundamental term. — The .case 
decided by the Ignited States Supreme Court illustrates a 
breach of this character. The plaintiffs contracted to ship 
five thousand tons of iron rails from European ports to 
defendants in Philadelphia, at the rate of about one thou- 
sand tons per month, beginning in February, 1880. Only 
four hundred tons were shipped in February, and eight hun- 
dred tons in March. As the market price of such rails had 
fallen, after the contract was made, the defendants were 
anxious to get rid of it, and the plaintiffs were equally anx- 
ious to hold to it. Plaintiffs' failure to ship the stipulated 
amount each month was such a breach of the contract, the 
defendants insisted, as discharged them from all liability 



CONTRACTS 99 

under it. Accordingly they refused to receive or pay for any 
rails tendered to them. It will be observed that plaintiffs' 
breach could not cause any loss to defendants, as the market 
price had fallen, and rails could be bought at a lower figure 
than that named in the contract. Defendants, therefore, 
were seeking to be relieved from this agreement in order to 
save themselves from a loss, which they would have sus- 
tained had the plaintiffs shipped the rails on time. 

The court, in deciding for the defendants, laid down the 
following principles : '^ In the contract of merchants, time 
is of the essence. The time of shipment is the usual and 
convenient means of fixing the probable time of arrival, 
with a view of providing funds to pay for the goods, or of 
fulfilling contracts with third persons. A statement de- 
scriptive of the subject-matter, or of some material inci- 
dent, such as the time or place of shipment, is ordinarily re- 
garded as a conditiofi precedent, upon the failure or non- 
performance of which the party aggrieved may repudiate 
the whole co7itract.^^ 

155. Effect of repudiation of contract by one party, be- 
fore performance by him is due. — Another question of im- 
portance, and one upon which, unfortunately, our state 
courts disagree, is whether a party is entitled to consider 
himself discharged from a contract and to sue for damages,. 
as soon as the other party gives notice of his intention not 
to perform. 

The prevailing view in this country, following that which 
obtains in England, is that he may. Very recently, the Su- 
preme Court of the United States has declared in favor of 
this view. In the case before that court a hop-dealer on the 
Pacific coast contracted to sell to a dealer in New York one 
thousand bales of hops, to be delivered in lots of one hun- 
dred bales, at stated dates, during a period of five years. 
After receiving six hundred bales the buyer notified the 
seller that he would not take any more hops. Suit was 



100 ESSENTIALS OF BUSINESS LAW 

brought at once by the seller, and the court held that it was 
well brought at that time; that he was entitled to treat 
the notice as " an anticipatory breach " of the remainder of 
the contract, and to recover such damages as he could prove 
that he had sustained. He proved that the price of the hops 
fixed by the contract was twenty-two cents a pound; that 
at the time he received the notice (which was the time of 
the "anticipatory breach"), he could have made contracts 
with others for the remainder of the hops, at nine cents a 
pound for the year 1896 and at eleven cents for the year 
1897-. Accordingly, he recovered a judgment for $10,- 
118.30. 

155 (a). Impossibility of performance. — This rarely dis- 
charges a contract. If one promises absolutely to do an 
act, as to sell and deliver goods, or to render services as a 
physician, at a specified time, he is not absolved from his 
contract by the fact, that, owing to strikes, he cannot obtain 
the goods, or to his call by a second patient, he cannot 
attend the first. He should have made his promise subject 
to a condition that the goods could be procured by him, or 
that his services were not called for by another. Under his 
contract, as made, he took the risk of being able to per- 
form it. 

At times, though not often, the circumstances attending 
the contract show that a condition was intended, though not 
put into words. Examples : A agrees to lease to B a certain 
building; or to sell him specified bales of cotton; or to ship 
goods by a particular ship ; or to render services as a physi- 
cian, or musician, or in any capacity, where performance 
by a substitute is not contemplated. If performance be- 
comes impossible because of the destruction of the building, 
or the ship or the cotton, or by the sickness of the party 
who was to render services, the contract is discharged. 



CHAPTER IV 

AGENCY 
§ 1. How THE EeLATION IS FORMED AND TERMINATED 

156. Definition of agency. — An agent, using the term in 
its broadest sense, is one who acts for and represents an- 
other, styled his principal; and the legal relation existing 
between such persons is called agency. 

157. Agency may result from appointment or from rati- 
fication. — As a rule, the agent receives his authority to act 
for and represent the principal before he does anything on 
the latter's behalf. But at times he does not. For example, 
A, knowing that B is anxious to sell certain property at a 
certain price, learns that C is willing to buy it. He is not 
B's agent. B has neither requested nor authorized him to 
sell the property. Nevertheless, he undertakes to sell and 
deliver it to C on B's behalf. He tells B what he has done, 
and B approves of the act. What is the legal effect of the 
transaction? Precisely the same as though B had author- 
ized A to sell the property as his agent. This adoption of 
the acts of an unauthorized agent is known as ratification; 
and it is a well-established maxim that the subsequent 
ratification of an act is in law equivalent to a precedent au- 
thority to do it. Hence, agency may be created by rati- 
fication as well as by previous appointment. 

158. Conditions of ratification. — It is not to be under- 
stood, however, that one can ratify any and every act done 
by another. Without attempting to discuss this point fully, 

101 



102 ESSENTIALS OF BUSINESS LAW 

we may say that the chief conditions of ratification are 
these : 1. The one doing the act must profess to do it, on 
behalf of an existing principal. Two illustrations will suf- 
fice to bring out clearly the meaning of this rule. A, with- 
out any authority to act for B in the matter, contracts in his 
own name and for himself alone to buy wheat of C. This 
contract of purchase can not be ratified by B and thus be- 
come his contract. B may, indeed, buy A's interest in the 
contract, but he can not make A's act his act, for, when it 
was done, it was not done on his behalf. Again, those who 
are engaged in organizing a corporation — " promoters," as 
they are often called — frequently employ persons or buy 
property while thus engaged. Such contracts of hiring or 
of purchase are not ratifiable by the corporation when it 
comes into existence. Of course, if the corporation takes 
the benefit of the services or of the property, it may be liable 
therefor, but such liability ought to rest, and the courts gen- 
erally declare it does rest, on the corporation's own contract 
made when it receives or retains the benefit. That this is 
the true ground of liability is apparent the moment we con- 
sider the consequences of ratification. 

We have pointed out, already, that a ratification is 
equivalent to a previous authority. That is, the act, which 
is ratified, is treated as though it had been authorized be- 
fore it was done. Accordingly, the rights and liabilities of 
the principal, the agent, and the third party will date bach 
to the original act. To say, therefore, that a corporation 
can ratify an act done before it is organized is to say that 
one can enter into a contract, or commit a tort before he 
is born. 

2. Another condition of a valid ratification is that the 
approval of the act be given with full knowledge of all the 
facts. An approval brought about by mistake or fraud is 
not binding as a ratification. 

3. The act can not be ratified in part and repudiated in. 



AGENCY 103 

pari. To illustrate : Suppose A, without B's authority, sells 
the latter's horse to C and warrants it to be sound. He re- 
ceives the price and pays it over to B, making a full state- 
ment of what he has done. If B keeps the money he is 
bound not only to let C keep the horse, but he is bound also 
by the warranty of soundness. He can not ratify the sale 
without ratifying the warranty also, for they were parts of 
a single transaction. 

159. Agency by operation of law. — Thus far we have 
been considering agency as the result of an agreement be- 
tween the principal and the agent. This is the way in which 
the relation ordinarily arises. As a rule, it is not forced 
upon the parties. The principal is at liberty to choose his 
agents, and an agent is equally free to select his principal. 
However, there are two important exceptions to this rule. 
Under the first exception we have agency by estoppel ; under 
the second, agency by necessity. In each of these cases the 
agency results from a rule of law, and not from the assent 
of the parties. 

The doctrine of agency by estoppel has been stated as 
follows by an eminent judge : " Where one has so acted, as 
from his conduct to lead another to believe he has appointed 
some one to act as his agent, and knows that another is 
about to act on that belief, then, unless he interposes, he 
will, in general, be estopped from disputing the agency, 
though in fact no agency really existed.^' This doctrine will 
be illustrated when we come to consider the liability of the 
principal for the unauthorized acts of the agent. 

The commonest example of agency by necessity is that 
which the law confers upon a wife, whose husband im- 
properly fails to supply her with necessaries. It gives her 
power to pledge his credit for them, even against his will. 
In the language of Chief-Justice Holmes, "it creates a 
compulsory agency." Some courts hold that a similar 
agency exists in favor of infant children against the father 



104 ESSENTIALS OF BUSINESS LAW 

who improperly neglects to supply them with the necessaries 
of life. Still another example of agency by necessity is 
afforded, when the chosen agent becomes suddenly sick or 
disabled, and the principal's property must be cared for, be- 
fore he can select a new agent. For example : A's driver 
drops from his seat in a fit. C takes charge of the team 
until A can be informed of what has happened. During this 
time C is A*s agent by necessit}^, and if a third party is in- 
jured by C's negligence in managing the team, A is liable, 
as he would have been for his driver's negligence. 

160. Legal capacity of principal and of agent. — Any 
person who is legally capable of contracting may appoint an 
agent. On the other hand, every person whom the law de- 
clares absolutely incapable of contracting, is equally inca- 
pable of appointing an agent. Thus far there is no dif- 
ficulty. But what is the rule as to persons, such as infants, 
whose legal incapacity is not absolute, and whose contracts 
are not void but voidable? 

It must be confessed that there is a serious difference 
of opinion upon this point. The older doctrine was that 
an infant could not act through an agent ; that his appoint- 
ment of one was void. This still prevails in England and 
in not a few of our States. The modern tendency of courts, 
however, especially in this country, is to liold that an in- 
fant's appointment of an agent is not void, tut voidable 
only, and, therefore, that after he is of age, he may ratify 
an agent's act as he could his own. 

Turning now to the inquiry, Who may be an agent? 
'e find the answer a plain and easy one. Any person may 
he an agent loho has sufficient natural capacity to do the 
act which is delegated to him. Of course, if he does not 
possess full capacity to contract, he will not be bound by 
his agreement to serve as agent ; but so long as he does serve 
his acts will bind his principal. This certainly is in ac- 
cordance with common sense. It is the principal who plans 



AGENCY 105 

and directs what shall be done, and who is to be liable for 
what is so done, while the agent is the mere instrument 
for the execution of the principal's purpose — the medium 
through which his will operates. 

161. Master and servant. — Hitherto we have used 
" agent " as a generic term — as including every one who acts 
for and represents another. It is often employed, however, 
as a specific term — that is, to designate a species or class 
of representatives. In this sense, it is contrasted with 
" servant.'^ When used in this way, it is limited to persons 
whose chief duty consists in making contracts between their 
employers and third parties ; while the " servant," as dis- 
tinguished from the " agent," is employed not to make con- 
tracts, hut to do other acts for his master. 

A century and a half ago servant was the broader term 
of the two. Blackstone uses it as including not only house- 
servants, apprentices, and laborers, but also stewards, fac- 
tors, and bailiffs. In his time agents were a species of serv- 
ants. Now servants are a species of agents. This change 
in the relative meanings of the two terms has taken place 
in response to a change in business affairs. Formerly the 
persons employed to represent others in making contracts 
were comparatively few. N"ow they are numerous and im- 
portant. It is the agent rather than the servant whose 
acts are of prime importance to the employer and to third 
persons. Hence the term agency has come to include the 
relations of master and servant as well as those of principal 
and agent. It is in this broad, generic sense that agency 
and agent will be used in this chapter, except when atten- 
tion is called to the fact that they are employed in their 
narrower signification. 

162. Classification of agents: general and special agents. 
— There are two modes of classifying agents : one according 
to the scope or extent of their authority, the other accord- 
ing to the nature of their duties. 



106 ESSENTIALS OF BUSINESS LAW 

The first method divides them into general and special 
agents. The Supreme Court of the United States has de- 
fined a general agent as one who is appointed to do acts of 
a class, and a special agent as one appointed to do individual 
acts. In the case then before the court the agent had been 
employed to buy cotton in Arkansas. He was to buy from 
whom he could, not from individuals specified by his em- 
ployer or principal. Accordingly, the court ruled that he 
was a general agent. Had he been sent to buy a particular 
lot of cotton, or to buy a described horse, he would have 
been a special agent. 

This classification is not a very important or helpful 
one. Still, when we come to deal with the liability of a 
principal for the acts of an agent which have not been ex- 
pressly authorized, we shall find the distinction between 
general and special agents playing quite a prominent part. 

163. Attorney at law and attorney in fact. — Let us now 
turn to the other classification of agents — that based upon 
the nature of their duties — and consider briefly some of the 
most important of these classes, taking them up in alpha- 
betical order. 

Attorney was at first a mere synonym of agent, meaning 
one put in the place, stead, or " turn " of another ; but now 
it is applied either to a professional lawyer who is author- 
ized to represent another, called his " client,'' in some legal 
proceeding, or to one who has received from his principal a 
letter or power of attorney. 

164. The authority of an attorney at law is regulated 
very largely by the rules or usages of courts. — As soon as 
he is employed, and without any special directions from his 
client, he has authority to do all acts in and out of court 
which are necessary or incidental to the proper conduct of 
the matter put into his hands. Indeed, so long as the rela- 
tion of lawyer and client continues, it is the agent, and 
not the principal, w^ho appears in court, who conducts the 



AGENCY 107 

proceedings, and who is recognized by the court officials 
as the one properly in control and management of the 
cause. 

An attorney in fact derives his power to act from the 
letter or poiver of attorney. It is important, therefore, that 
this instrument be drawn up with care. The following is 
a power of attorney, giving very full and detailed authority 
to an agent, who is to represent and act for his principal in 
various business transactions with a bank: 

UnotD all Mtn bg tl)csc JJreseuts: 

That I, John Doe, of Utica, County of Oneida and State of New 
York, have made, constituted and appointed, and by these presents 
do make, constitute and appoint Kichard Roe, of New York City, 
my true and lawful Attorney for me and in my name, place and 
stead, in transacting any business directly or indirectly, with the 
CfCorn 25):cl)an3c 3l5anlt, N. Y., its Officers or Agents, to sign, indorse, 
draw, accept, make, execute and deliver, all such Notes, Checks, 
Bills of Exchange, and other Contracts or Instruments in writing, 
with or without seal, and such Verbal Contracts as he may deem 
proper, giving and granting unto my said Attorney full power and 
authority to do and perform all, any, every act and thing whatso- 
ever, requisite and necessary to be done in and about the premises, 
as fully, to all intents and purposes, as I might or could do if per- 
sonally present, with full power of substitution and revocation, 
hereby ratifying and confirming all that my said Attorney or his 
substitute shall lawfully do or cause to be done by virtue hereof; 
and any such Notes, Checks, Bills of Exchange, Contracts or Instru- 
ments, signed, indorsed, drawn, accepted, made, executed or deliv- 
ered by my said Attorney, and which shall be hereafter received by 
or come to said Bank, or its said Officers or Agents, shall bind, and 
are hereby ratified and confirmed by the undersigned. 

JEn 5!15b*ftncss 5!2^^icreof, I have hereunto set my hand and seal 
the First day of February, in the year one thousand nine hundred 
and two. 

Sealed and delivered in presence of 

James Sylvester, t _^ t^^^t. ] ot^ax \ 

^ ' John Doe. < seal \ 

David Jenkins. ( J 



108 ESSENTIALS OF BUSINESS LAW 

Instead of being signed by witnesses, it may be ac- 
knowledged before a notary public, whose certificate would 
be as follows : 



Oneida County, ) 

Be it known, that on the first day of February, in the year ono 
thousand nine hundred and two, before me, the undersigned, a 
Notary Public, personally came John Doe, and acknowledged the 
above letter of Attorney to be his act and deed. 

fin STestimonj JH&^zvzott 1 have hereunto set my hand and 
affixed my seal the day and year aforesaid. 

f notary's ) Richard Smith, 

( SEAL ) • Notary Public in and for Oneida County. 

165. Auctioneers. — An auctioneer is one whose business 
it is to sell property, at public auction, to the highest bidder. 
Because of the public character of auction sales, and the op- 
portunity they give for dishonest practises, their conduct is 
often regulated by city ordinances and by State statutes. 
These usually fix or limit the amount of the auctioneer's 
fees, and require him to take out a license, as well as to give 
a bond for the honest conduct of his business. 

One of the peculiarities of the auctioneer is that he 
may be the agent of both parties. In offering the property 
for sale, in fixing the terms upon which it is to be sold, and 
in making statements about its quality and condition, he 
is the agent of the seller. But when the buyer's bid is ac- 
cepted and the property knocked down to him, the auction- 
eer becomes his agent to put down his name as purchaser 
and thus to sign for him a memorandum of the sale, which 
will make the contract binding under the statute of frauds. 
This agency for the buyer, hotuever, is confined to the time 
and place of the sale. It is based upon usage (although this 
usage is, in some States, confirmed by statute) and not upon 
an express contract. 



AGENCY 109 

Another respect in which the auctioneer differs from 
most agents is his right to sue in his own name for the 
purchase price of personal property. Ordinarily the prin- 
cipal and not the agent must sue. This right of the auc- 
tioneer is due, also, to business usages. Personal property 
is generally put into his possession. He is responsible to 
the owner for its safe-keeping. He is also responsible for 
the collection and payment over to the principal of the 
price, less his commissions. Hence, it is held, he has a spe- 
cial interest in the property — a sort of ownership of it — • 
which entitles him to sue for the price in his own name. 

166. Bank cashiers. — In the bank cashier we have an 
excellent example of a general agent, in the broadest sense 
of that term. It is true that in some banking-houses the 
president shares with the cashier the control of ordinary 
business, but as a rule the cashier is the sole executive chief 
of the hanh. He has charge of the receipts and payments 
of money, of the purchase and sale of bills of exchange, of 
loaning and borrowing money, of indorsing and collecting 
negotiable paper for the bank, and of certifying checks for 
depositors. He may be authorized to employ tellers, dis- 
count clerks, and other subordinates to help him, but in 
doing any of the acts above enumerated, whether by such 
subagents or in person, he binds the bank. For example, 
he certifies a depositor's check as good, when, in fact, the 
depositor has no money to his credit. That certification is 
binding on the hanlc in favor of any one who taTces the cer- 
tified cJieck for value and without notice of the falsity of the 
cashier s statement. 

167. Brokers. — These cover a very extensive field of busi- 
ness transactions and are divided into many classes. We 
have bill and note brokers, insurance brokers, merchandise 
brokers, money brokers, pawnbrokers, real-estate brokers, 
stock brokers, and ship brokers, each class receiving its name 
from the particular line of business in which it is engaged. 



110 ESSENTIALS OF BUSINESS LAW 

The distinctive characteristic of a broker is that he under- 
takes to bring the buyer and seller, the lender and the bor- 
rower, the insurer and the insured, to an agreement. Ac- 
cordingly, an insurance broker is not to be mistaken for an 
insurance agent. The latter is an agent of the insurance 
company, while the business of the former is to negotiate be- 
tween the insurer and the insured and bring them to an 
agreement. 

Until and unless the broker brings the parties to an 
agreement, he does not earn any commissions. For unsuc- 
cessful efforts he is not entitled to compensation. " The 
risk of failure is wholly his. His reward comes only with 
success." 

168. Factor, or commission merchant. — His business is 
to receive personal property and sell it for a commission. 
He differs from a broker, it will be noticed at once, in having 
in his possession tht property about which he is to nego- 
tiate. Moreover, he often makes advances to the owner of 
goods sent to him. For any money so advanced, as well as 
for his commissions, he has a lien on the goods and on the 
proceeds obtained from this sale. By the usages of trade 
he has the power to sell in his own name and to sue in 
his own name for the price, as well as for damages to the 
goods. 

But, at common law, he had no implied authority to 
pledge or barter; his authority was to sell. This has been 
changed in England and in some of our States by statutes 
called factors' acts. Their provisions, however, are so vari- 
ous and so complicated that we can not attempt to discuss 
them here. 

At times the factor, for an extra commission, guarantees 
the payment of the price by the buyer. In such a case, of 
course, if the buyer fails to pay for the goods the factor 
is bound to pay out of his own pocket. He is then called a 
del credere factor. 



AGENCY 111 

169. Ships' husbands and masters of ships. — These 
agents have a very extensive authority. At times one man 
fills both positions, but, as a rule, the ship's husband, or, as 
he is now generally called, the 7nanaging owner, is " the 
general agent of the owners, in regard to all the affairs of 
the ship in the home port." He it is who arranges for the 
equipment or repairs of a ship, who hires the officers and 
crew, and has charge of all contracts for freight and pas- 
sengers to be carried by her. 

The master of a ship is the one who has command of her. 
Ordinarily he is called captain, but an officer of lower rank, 
such as a mate, may be put in command either by the owners, 
by the ship's husband, or by the captain, and thus become 
the ship's master. In the home port his authority is sub- 
ordinate to that of the ship's husband or managing owner, 
but during the voyage or in a foreign port his power is 
supreme to act on behalf of the owners, to pledge their 
credit, and to make the ship itself liable for money bor- 
rowed or supplies furnished when these are absolutely neces- 
sary to enable him properly to protect the ship and its 
cargo or to accomplish his voyage. 

170. Termination of agency. — Having pointed out the 
ways in which agency may be instituted, and having con- 
sidered briefly some of the more important classes of agents, 
let us now inquire how the relation of principal and agent 
may be terminated. 

The general rule upon this point may be stated thus: 
Agency may he terminated by the assent of both parties, 
or by the act of one, or by the operation of law. To this 
rule there is an exception, viz., that when the agency is 
coupled with an interest it can be terminated only by the 
agent's consent. The exception, however, involves so much 
of technical law, and is so rarely enforced, that we shall not 
attempt to explain it here. 

It is very clear that the relation of principal and agent 



112 ESSENTIALS OF BUSINESS LAW 

must end when the parties are agreed that it shall end. This 
agreement may be made in advance, as where the agent is 
hired for a year. At the end of that time the agency ter- 
minates, because the parties have agreed that it shall ter- 
minate then. So when the agency is one at will, the parties 
assent in advance that it may terminate at the will of either 
party. 

It is also clear that either principal or agent has the 
legal power to end the agency without the other's assent — 
nay, even against the other's wish and protest. This follows 
from the fact, already brought out, that the relation is one 
of contract, for a, party to a contract has the legal power to 
Ireak it, though by breaking it he may render himself liable 
to pay damages for the breach to the other party. Of course, 
if the agency is gratuitous, as where the agent is to receive 
nothing for his services, either party may end the relation 
without liability to pay damages, for there is no contract — 
it is a mere matter of agreement without a consideration. 

The law puts an end to agency in several cases. This 
happens when the agency becomes illegal, or its perform- 
ance becomes impossible. An example of the latter case 
would be an agency for renting a particular building which 
is afterward destroyed without the owner's fault. Upon 
the death of either principal or agent, the law terminates 
the agency. This follows necessarily from the fact that 
agency rests upon a continuing contract between the parties. 
The death of either withdraws his assent. A like result 
occurs when either party is judicially declared insane or 
hanJcrupt. The insane person has not a consenting mind, 
and the control of his property rests in a guardian or 
trustee appointed by the court. A bankrupt's property 
passes to his assignee or trustee, and his person become^, 
to some extent, subject to the control of the court. At 
common law, marriage terminated any relation of principal 
gnd agent which had existed between the parties. The hus- 



AGENCY 113 

band and wife were one person, in law, and for most pur- 
poses the husband was that person. 

171. Notice of termination. — Whenever the agency is 
ended by operation of law, notice of its termination need 
not be given either to the other party to the relation or 
to third parties. This is .sometimes explained by saying that 
death, or an adjudication of insanity or of bankruptcy, is 
a public event, of which the whole world is bound to take 
notice. Such an explanation seems only an artificial way 
of saying that the law, which puts a stop to the agency, also 
relieves the parties from necessity of giving the notice that 
must be given in case the agency is terminated by the private 
acts of the parties. 

The reason for requiring notice of the termination of 
an agency which has been ended by the acts of one or both 
of the parties is very plain. // notice were not given, third 
persons would naturally suppose the agency continued, and 
would act upon that idea. To save such persons from being 
misled to their harm, notice is required. Where the reason 
for this rule does not exist, the rule itself has no operation. 
For example, if a person who deals with an agent knows 
that the agency has been limited to a definite time — say 
six months or a year — or to a particular act or series of 
acts, such as the private sale of a horse, or the sale at 
auction of a lot of goods, he is not entitled to any addi- 
tional notice of the termination of that agency. But sup- 
pose that the person has dealt with a bank cashier, or an 
insurance agent, or a traveling salesman, whose term of 
employment he knows nothing about. Naturally he will 
continue to deal with such agent in reliance on his original 
authority until he receives notice that the authority has 
been withdrawn, or, in other words, that the agency has 
ended. 

Accordingly, until notice of termination is given, the 
principal will bg bound bj the acts of a former agent, thougli; 



.114 ESSENTIALS OF BUSINESS LAW 

he is no longer an agent, in favor of tliose who are misled by 
the principal's failure to give notice. 

§ 2. Principal's Liability for Agent's Acts 

172. His contract liability. — We come now to consider 
some very striking peculiarities of this branch of the law. 
In the first place, when an agent makes a contract, which 
he is actually authorized to make, between his principal and 
a third party, he drops out of the transaction entirely. 
True, -it is his mind which has met the mind of the third 
party in negotiating and closing the agreement. The prin- 
cipal's mind may have been absolutely unconscious of what 
was taking place between the third party and the agent 
Yet, in legal contemplation, it is his mind ivhich is in agree- 
ment with third party's mind. The co?itract and obligation 
are his, not those of the agent. 

In the second place, the principal may become a party 
to a contract luhose terms are squarely contrary to his ex- 
pressed ivill. This results from the legal principle that the 
act of an agent done within the scope of his apparent au- 
thority is in law the act of the principal. Let us illustrate. 
A sends B out to buy wheat, or cotton, or corn, or hops, but 
instructs him not to pay more than a certain price. Never- 
theless, B does buy at a higher price, paying a part and 
pledging A to pay the balance. A is bound by the contract, 
unless the seller knew that B was not authorized to make it. 
The scope of B's apparent authority was to buy at such 
prices as he should name. 

173. Meaning^ of scope of apparent authority. — The 
scope or extent of an agent's apparent authority is deter- 
mined, generally, by the conduct of the principal and by 
business usages relating to the particular transaction. 

A person permits his coachman to select supplies for his 
stable, or his butler or cook to order articles for the kitch- 



AGENCY 115 

en, and pays the bills. By such conduct he holds these 
agents out as having authority to agree for him as to the 
quality and price of articles ordered. After such holding 
out, suppose he tells his coachman to buy a cheaper grade 
of feed, or a particular style of harness, or tells his cook 
not to buy any more apples or potatoes while the price is 
high. Do these orders change the scope of the agent's ap- 
parent authority? Clearly not, unless the tradesmen with 
whom he has been accustomed to deal are notified of them. 

By business usages, a factor or commission merchant is 
authorized to sell at such times and for such prices as he 
deems best, and in many cases to warrant the quality of the 
goods. Sales made by him, in accordance with such usages, 
will bind his principal, although the latter has directed him 
not to sell at all, or not to sell at the price which he ob- 
tained, or not to warrant the goods. Secret instructions to 
an agent can not change the scope of his apparent authority. 

174. The principal's liability in tort. — Here again the 
act of the agent or servant, when actually authorized, or 
when within the scope of his apparent authority, is, so far 
as the principal or master is concerned, his act. Hence, a 
party injured by the negligent act of A's omnibus driver 
is entitled to recover his damages from A. Authorities 
differ both as to the origin and the reasonableness of this 
rule, and the subject is too large and perplexing to be dis- 
cussed at any length here. Perhaps it is enough to say 
that one of our greatest American judges has declared : 
" This rule is obviously founded on the great principle of 
social duty, that every man in the management of his own 
affairs, whether by himself or hy his agents or servants, 
shall so conduct them as not to injure another; and if he 
does not, and another thereby sustains damage, he shall 
answer it." 

It should be borne in mind that the position of the 
agent or servant who has committed a tort under the ex- 



116 ESSENTIALS OF BUSINESS LAW 

press authority of his principal or master is very different 
from that of him who has bound his principal by an author- 
ized contract. He does not drop out of the transaction. 
While his wrongful act renders the principal liable for 
damages, it makes him liable too. It is true that the in- 
jured party usually sues the principal, and pays no atten- 
tion to the agent or servant. But that is only because the 
principal usually has more money with which to pay dam- 
ages than the agent. Still, the omnibus driver, the coach- 
man, the street-car driver, or the locomotive engineer, is 
personally liable for every injury caused hy his negligence, 
although his principal is also liable. Nor will the fact that 
the agent or servant did the wrongful act at the express 
command of the principal or master enable him to shirk 
liability. For example. A, without excuse, tells his servant 
to knock B down, or to shoot B's valuable dog, and the 
servant obeys, rather than lose his place. He is liable for 
the tort. B may sue either the servant or A, or he may sue 
both, and may obtain a judgment against each. As, how- 
ever, he is entitled to be paid but once, it follows that if he 
collects one judgment he can not collect the other. 

175. Acts done outside the scope of apparent authority. 
— It is only for those acts of the servant or agent which are 
actually or apparently authorized that the principal or 
master is liable in tort. For acts done outside the scope of 
even apparent authority the agent or servant is alone liable. 
Such is the rule of law accepted and applied by all courts. 
It appears to be a very plain and simple rule. And it is. 
Still, the courts have often differed in applying it to similar 
sets of facts. Cases of that kind, however, we can not un- 
dertake to discuss and criticize here. All that we shall at- 
tempt to do is to show the meaning of the general rule by 
a few examples. 

Two cases, decided by the New York Court of Appeals 
during the same year (1892), illustrate the rule very well. 



AGENCY IIY 

In the earlier case, a railroad ticket agent ordered the 
arrest of the plaintiff on the charge of passing counterfeit 
money when buying railroad tickets. The agent had been 
warned by a police detective that men answering to a cer- 
tain description were passing counterfeit five-dollar bills. 
He thought the plaintiff answered the description and that 
the bill which plaintiff handed him for the tickets was coun- 
terfeit. He took the bill, gave the plaintiff his change and 
tickets, and ordered the policeman to arrest him. It turned 
out that the bill was a good one. Plaintiff was discharged 
from arrest and sued the railroad company for the tort of 
false imprisonment. He was beaten. 

In the latter case a woman was arrested by a ticket seller 
of the elevated road in ISTew York city, who charged her 
with passing a counterfeit quarter for her ticket. She in- 
sisted that the quarter was good, and refused to give back 
the ticket or the change. It was good. She sued the rail- 
road company and recovered large damages. How do these 
cases differ ? Why should the principal be liable in the one 
case and not in the other? Because, said the court, the 
plaintiff in the earlier case was not acting within the scope 
of his apparent authority, while in the latter he was. In the 
former he took the bill, which he believed to be counterfeit, 
and had the plaintiff arrested in the hope of bringing a 
criminal to Justice. He was not acting in the interest or 
for the benefit of his principal. He was intent upon ren- 
dering a service to the public. In the latter case the agent 
received the money and gave out the ticket and change 
before suspecting the quarter to be counterfeit. He then 
demanded the ticket and change, so as to save his principal 
from loss. The fact that he blundered and lost his tem- 
per and did what he was not actually authorized to do did 
not relieve the principal. The agent was trying to protect 
and recover his principal's property, to promote his inter- 
ests, to carry on his business. 



118 ESSENTIALS OF BUSINESS LAW 

176. Liability for agent's wilful or malicious acts. — Not 

only for unauthorized acts of his agents or servants may 
the principal or master be responsible, bnt'his liability may 
extend to acts done hy them for the sole purpose of injuring 
others. For example, an engineer blows the whistle in 
order to frighten plaintiff's horse on a public road, causing 
it to run away and injure plaintiff and his property; or he 
runs down and kills plaintiff's cattle when he might have 
avoided them ; or a motorman wilfully runs his car against 
plaintiff's wagon without any necessity therefor ; or a milk- 
dealer's driver adulterates milk so that he may steal a part 
of it : the principal is liable. In each case the act done is 
within the scope of the agent's apparent authority or within 
the course of the servant's employment. Of course, if the 
act is outside the scope of apparent authority or the course 
of employment, the principal or master is not responsible 
for it. Suppose a street-car conductor leaves his car, chases 
and injures boys who have been trying to steal a ride. The 
company will not be liable for the injuries, for the conductor 
is not acting in the line of his employment. 

177. Principal may be liable to criminal punishment for 
agent's acts. — How large is the risk a man runs who chooses 
or is obliged to have agents or servants is not fully dis- 
closed until we consider his criminal liability for their acts. 
Some crimes can not be committed without an actual evil 
intent. Murder and burglary are of this class. In such 
cases the intent of the agent is not chargeable to the prin- 
cipal simply because of the agency. The criminal act must 
have been actually authorized or adopted hy the principal. 

But other crimes do not involve the question of intent. 
Violations of excise or health laws are often of this charac- 
ter. In such cases the criminal act of the agent is the 
criminal act of the principal. For example, a statute abso- 
lutely prohibits the sale of liquor during certain hours, 
either by a licensed dealer or by his employees; or the sale 



AGENCY 119 

of oleomargarine in unstamped packages. A bartender or 
a clerk makes a sale in violation of the statute, but in the 
course of his employment. It is no defense to a criminal 
prosecution of the liquor dealer or the grocer that such 
sale was in violation of his orders. The act is his act, and 
he must suffer the penalty. 

178. Distinction between agent or servant and inde- 
pendent contractor. — We have seen " that every man in the 
management of his own affairs, whether by himself or by 
his agents or servants,'^ is bound so to " conduct them as 
not to injure another." Does this duty of an employer ex- 
tend to the acts of an independent contractor, i. e., of one 
who contracts to do a particular job in accordance with cer- 
tain specifications, but over whose conduct and methods the 
employer does not reserve the right of control? 

The answer is that, as a rule, it does not. A contracts 
to repair B's house, in accordance with the plans and speci- 
fications furnished by B's architect. During the progress 
of the work C is injured through the negligence of A or of 
his workmen. B is not liable to C. B is not managing the 
work, either in person or by his agent or his servant. It is 
A's work. He is the manager of the affair and the master 
of the workmen. Accordingly he is responsible and not B. 
There are some exceptions to this rule, but the courts are 
not entirely in accord regarding them, and we shall not 
enter into their consideration here. 



§ 3. Principal's Eights Acquired through Acts of 

Agent 

179. In case of a disclosed principal. — Ordinarily the 
party with whom the agent deals knows for whom the agent 
is acting, and it is the intention of all the parties that the 
transaction shall be one between the principal thus known 
and the third party. The agent drops out of the transac- 



120 ESSENTIALS OP BUSINESS LAW 

tion, and the principal acquires all the rights which he 
would have secured had he conducted the affair in person. 
The agent's acts are his acts. 

180. In case of an undisclosed principal. — At times, 
however, the agent does not disclose his principal. This 
often happens when the agent is a factor. In such cases 
what are the undisclosed principal's rights? Here, again, 
we are to apply the doctrine that the acts of the agent are 
the acts of the principal. The rights acquired are, there- 
fore, the principal's rights. If a factor sells his principal's 
goods on credit, as his own, the principal may in his own 
name sue the buyer for the price. It is true, these rights of 
the undisclosed principal are subject to some qualifications 
and exceptions, but the general rule is that stated above. 

§ 4. The Agent's Liability to Third Persons 

181. His liability in tort. — This has been referred to in 
a previous section, and we need only repeat the rule there 
laid down, that an agent is liable for his wrongful acts, al- 
though they were done at the request or command of his 
principal. 

182. His contract liability. — This also has been men- 
tioned, but needs to be explained more fully. We have seen 
that when he negotiates a contract between his principal and 
a third person, keeping ivithin the limits of his authority 
throughout, and having the contract properly drawn and 
executed, he drops out of the transaction and incurs no 
legal liability. But suppose he fails in either of those two 
respects ; does he thereby make himself liable to the third 
party ? Let us consider the two cases separately. 

183. The agent's liability for unauthorized contracts. — 
If he induces the third person to contract with a principal, 
for whom he knows he has no authority to act, he is guilty 
of deceit, and is personally liable for any damages which 



AGENCY 121 

Ms wrongdoing may cause the third person. This is very 
clear. 

If, however, he honestly thinks he has authority, but 
does not have it, his conduct may be just as harmful to 
the third person as in the preceding case. Who shall suffer? 
Surely the one who is at fault, and that one is the unau- 
thorized agent. He must pay the damages sustained hy the 
third person through his fault. 

184. The agent's liability upon contracts improperly 
executed. — This liability is confined chiefly to contracts un- 
der seal, and to negotiable paper, such as bills of exchange 
and promissory notes. In the case of other written con- 
tracts, the form in which they are drawn up and signed is 
not conclusive against the agent. If all the facts show that 
he and the third party intended that the contract should 
bind the principal and not him, the courts will give effect 
to that intention, although the writing itself would seem to 
bind the agent. 

However, the safe course for the agent in all cases is to 
have the written contract made out in the name of the prin- 
cipal, and signed in his name by the agent. If thus drawn 
up and executed, the agent will incur no personal liability. 
On the other hand, if a contract under seal recites that it 
is made by John Smith, agent for Jesse James, and con- 
cludes with these words, " I hereunto set my hand and 
seal, John Smith, agent for Jesse James," the agent and 
not the principal will he hound. This is due to the tech- 
nical rule of the common law, that no one hut a party to a 
deed — i. e., a contract under seal — is liahle to he sued upon 
it. In the foregoing case John Smith is the maker of the 
deed, and the seal is his seal. 

So a promissory note or a bill of exchange ought to be 
signed in the name of the principal by the agent — e. g., 
" Jesse James, by John Smith, agent." This is because of 
the technical rule of the law merchant, that persons dealing 



122 ESSENTIALS OF BUSINESS LAW 

with negotiable instruments are presumed to take them on 
the credit of the parties whose names appear upon them. 
This rule, however, is not enforced quite so strictly as that 
relating to contracts under seal. If the entire instrument, 
including the signature, shows that it w^as intended to be the 
bill or note of the principal, he will be held and the agent 
not. Indeed, even when the intention is not clearly shown by 
the paper, some courts permit other evidence of the inten- 
tion to be given; and then enforce the contract against 
either the principal or the agent, according as it is shown 
to have been intended to bind the one or the other. 



§ 5. The Agent's Eights Against Third Persons 

185. In case of contracts. — An agent's rights against 
third persons can be disposed of very quickly. Indeed, some 
of them have been already referred to. We have seen that an 
auctioneer of personal property or a factor may sue in his 
own name for the price of goods sold. So may any agent who 
has a beneficial interest in the price — i. e., who has a right 
to retain a part of the price for his commissions, advances, 
or expenditures. 

Again, an agent wdio is named as a party to a deed or to 
a bill or note, may sue upon it. Generally speaking, how- 
ever, in such an action, the third party may avail himself of 
any defense which would have been good against the piin- 
cipal, for the suit is brought largely, if not wholly, for the 
principal's benefit, although in the agent's name. 

186. In case of tort. — The ways in which third persons 
may wrong an agent in his position as ageiit (for we are 
not now considering him in his individual capacity) are 
not numerous. Perhaps the commonest form of tort against 
him is that of wrongful interference with the principal's 
property, which is in his possession and upon which he has 
some lien or claim. For example, a third person who wrong- 



AGENCY 123 

fully takes from. an auctioneer or a factor the principaFs 
property, may be sued in tort by the agent. 

Another way in which a third person may make himself 
liable in tort to an agent is by coercing the principal to dis- 
miss him through threats of injury to the principal if he 
does not. Indeed, some courts have held third persons 
liable in tort ivho have peacefully persuaded the principal 
to break his contract with the agent. 

§ 6. Duties of the Principal and Agent toward Each 

Other 

187. Duties of the principal toward the agent. — In gen- 
eral terms these may be said to consist in keeping his con- 
tract with the agent ; in paying him fairly for his services, 
when a rate of compensation has not been agreed upon; 
in snaking good his expenditures; and in saving him harm- 
less from all claims against him, because of authorized or 
ratified acts done by him as agent'. 

To this last-named duty there are some exceptions. For 
example, if the agent's acts were known or ought to have 
been known by him to be illegal, the principal is not legally 
bound to save him harmless from their consequences. The 
principal orders his agent to knock a man down, or to de- 
stroy his property without lawful excuse, and the agent 
obeys. If the third party sues the agent and recovers dam- 
ages from him he can not lawfully call upon the principal 
for reimbursement. This rule of law was not established 
out of regard for the dishonest principal, but with a view 
to discourage law-breaking by agents. 

188. Duties of the agent toward the principal. — With- 
out irreverence these may be summed up in a command- 
ment, " Thou shall love thy principal as thyself/' An agent 
who IS disloyal, or half-hearted, or covetous, or secretive is 
in danger of the judgment. He is bound in law, as in 



124 ESSENTIALS OF BUSINESS LAW 

morals, to serve but one master, and to serve liim with the 
utmost good faith. He is bound to give him all the informa- 
tion which he obtains relating to the business intrusted to 
his care; to obey instructions; to exercise proper skill, and 
to account fully and honestly for everything that comes into 
his hands in the agency. 

§ 7. Master's Statutory Liability to Servant 

188 (a) . Fellow-servant doctrine. — ^\e have seen that the 
master is liable to third parties for harm done by his ser- 
vants in the course of their employment and of his business. 
If the injured person, however, was a fellow servant of 
the wrongdoer, our law, as expounded by the courts both 
in England and in this country, did not subject the master 
to the same liability as to outsiders. It was the accepted 
view that one who entered an emplo}mient in which he had 
fellow employees took the risk of their being negligent ; that 
he received higher wages because of this risk, and that his 
knowledge that he could not recover from the common em- 
ployer for injuries caused by a negligent fellow-servant 
would make him '^^prompt and vigilant in reporting unfit or 
negligent fellow-servants." 

It is to be observed that the fellow-servant doctrine is 
not as broad as intimated above. The master's exemption 
from liability to a servant for the negligence of a fellow- 
servant is not unqualified. Quite the contrary. It is sub- 
ject to the condition that he has performed his legal duties 
towards the injured servant. These consist in (1) using 
reasonable care to employ suitable and sufficient fellow- 
servants; (2) to have proper rules for the conduct of his 
business; (3) to provide a safe place for work; (4) to pro- 
vide proper appliances and reasonable inspection of plant 
and appliances; (5) to give due warning of danger. Nor 
can the master escape liability by delegating any of these 



AGENCY 125 

duties to others. He is bound at his peril to see that they 
are performed. Though he exercises the greatest care in 
selecting employees to whom he commits their perform- 
ance^ he is liable to a servant injured as a result of their 
non-performance. To this extent, the master is liable at 
common law to a servant for a fellow servant's negligence. 

188 (b). Statutory modifications of rule. — Although 
our law reports show that many of the risks, incident to fel- 
low-service, had to be borne by the master and not by the 
servant, public opinion, both in England and in this coun- 
try, demanded a modification of the fellow-servant rule. It 
was accomplished by legislation known as Employers' Liabil- 
ity Acts. The English act of 1880 (Ch. 42, 43 and 44 Vict.) 
has served as a model for the Federal Employers' Liability 
Act (Ch. 149, L. 1908, 35 St. L. 65) and similar statutes in 
many of our States. They abolish entirely in the case of 
certain employers, such as railroads, the fellow-servant rule. 
Some of them relieve the servant from the common law 
doctrine of assumption of risks, incident to the employment, 
and from the consequences of his contributory negligence. 
They also limit, in various ways, the right of master and 
servant to contract for the former's exemption from lia- 
bility, and often impose an absolute duty upon the master 
to provide particular safety appliances. 

188 (c). Workmen's Compensation Acts. — The freedom 
of contract between master and servant was further limited, 
and the master's liability to the servant further extended by 
legislation bearing the foregoing title. Here, again, an act 
of Parliament of 1906 (6 Edw. VII, Ch. 58) has served 
as a model for Congress and State Legislatures. The legis- 
lation compels the employer to pay employees for injuries 
sustained in the business, even though they are not due to 
his fault; they limit the amount which employees can re- 
cover, and they provide, through insurance or other means, 
that the sums paid by the employer may be added to the 



126 ESSENTIALS OF BUSINESS LAW 

cost of production, and thus be borne, ultimately, by the 
community. 

In England, the authority of Parliament to change the 
rules of law and to add to the legal liability of the employer 
is unquestioned. In this countr}^, however, constitutional 
provisions prohibit legislation which takes a person's prop- 
erty without due process of law. It was contended by em- 
ployers that workmen's compensation acts took the employ- 
er's property without due process of law, where they com- 
pelled the employer, who was without fault, to pay sums to 
the employee for injuries not due to the employer's wrong- 
doing. This contention was sustained by the New York 
Court of Appeals in Ives v. South Buffalo Ey. Co. ('201 
N. Y. 271) and the first Workmen's Compensation Act of 
that state was declared unconstitutional. A similar de- 
cision was made in the state of Montana. The Ives case 
led to an amendment of the New York Constitution, which 
authorized such legislation, and another act was passed 
(Ch. 816, L. 1913, and Ch. 41, L. 1911), which has been 
upheld as valid. 

The statutes of Congress and of the several states differ 
in many respects, but their primary purpose is to secure 
to an injured servant, who is without wilful fault in the 
matter, a definite sum, based upon his loss of earning 
power, which shall be paid to him speedily and without the 
expense of prolonged litigation. He is prohibited from 
waiving statutory rights and from making a contract 
assigning, releasing or compromising his claim to compen- 
sation. The operation of these laws has been beneficial to 
both employers and employed. The former, according to a 
report of an industrial commission, "have been relieved of 
the worry and cost of litigation, and have had the satisfac- 
tion of knowing that money spent for compensation was 
being received by the workmen who were injured, rather 
than going for attorney fees, costs and the expenses." 



CHAPTER V 

BAILMENTS, INCLUDING THE OBLIGATIONS OF POSTMAS- 
TERS, INNKEEPERS, COMMON CARRIERS, AND TELE- 
GRAPH COMPANIES 

S 1. Nature and Classification of Bailments 

189. Origin and modification of the term. — Bailment is 

derived from the French word hailler, meaning to deliver, 
and was originally applied to the class of business transac- 
tions which we are about to consider, because the basis of 
obligation in every case was supposed to be the delivery of 
something by its owner, called the bailor, to another, called 
the bailee. The term has been modified and broadened, 
however, so as to include transactions, where there has not 
been a delivery by the owner. A person who finds an article 
and takes it into his possession is a bailee. So is a sheriff, 
marshal, or constable who takes property under an execu- 
tion or other process of a court. So is a postmaster or letter- 
carrier, although the article, when put into his possession, 
is not owned by the one who delivers it at the post-office, 
but the one to whom it is directed. 

At present, therefore, the distinguishing characteristic 
of a bailment does not consist in the fact of a delivery of 
personal property by the bailor to the bailee, so much as in 
the fact that the person having possession of the property is 
under a duty to hold it for a special purpose, and to sur- 
render it when that purpose is accomplished. 

127 



128 ESSENTIALS OF BUSINESS LAW 

190. Bailee's duty may result from agreement or from 
a rule of law. — Ordinarily the duty of the bailee, referred 
to above, is fixed by the terms of his agreement with the 
bailor. A man borrows a horse, or receives a watch to be 
cleaned, or undertakes to transport a package as a common 
carrier; in each case he expressly or impliedly contracts to 
surrender the property as soon as the special purpose for 
which he has received it is accomplished. 

But what of the finder of goods, or the sheriff who has 
seized them under an execution, or a postmaster or letter- 
carrier in possession of mail-matter? In neither case does 
a contract exist between the bailor and bailee. And yet if 
the finder disposes of the goods without any effort to dis- 
cover the owner, or if he refuses to deliver them to him 
upon demand, he commits the tort of conversion, and ren- 
ders himself liable to pay the owner for the goods. Indeed, 
he may commit larceny, and be liable to criminal punishment 
therefor. So the sheriff is bound to surrender the goods 
seized by him if the owner tenders the amount of the execu- 
tion and sheriff's fees. And the postmaster must deliver the 
mail to the one to whom it is addressed. If he demands 
more postage than he is entitled to and refuses to deliver 
until that is paid he. may be sued and compelled to pay 
damages for his misconduct.^ 

In each of these cases the bailee's duty to surrender the 
property is imposed upon him by the law. 

^ This was decided by the United States Supreme Court some fifty 
years ago. The postmaster at Syracuse, N. Y. , refused to deliver a 
newspaper unless letter postage on it was paid. This was claimed 
because there was an initial upon the wrapper distinct from the direc- 
tion. Plaintiff refused to pay, and sued the postmaster for conver- 
sion before a justice of the peace. He obtained a judgment for 6 
cents damages and $2.98 costs. The postmaster carried the case up 
through the county court, the State Supreme Court, the State Court 
of Appeals, to the Supreme Court of the United States, and was beaten 
ya each court. It would be interesting to know how nauch it cost tjie 



BAILMENTS 129 

191. Bailment is confined to personal property, which 
must be delivered over in specie. — The Roman law recog- 
nized a bailment of land, but our law does not. The relation 
existing between the owner of real property and one in 
possession of it is ordinarily that of landlord and tenant, 
never that of bailor and bailee. Moreover, according to our 
law, a bailment exists only where the bailee is hound to 
redeliver the verij thing which is hailed to him. If A hires 
a flock of sheep for a year, agreeing to return the same 
sheep, the transaction is a bailment. If, on the other hand, 
he takes a flock of sheep agreeing to return at the end of 
three years the same number of equally good sheep and a 
certain amount of money, the transaction is a sale and not 
a bailment. Again, if a man borrows a horse of his neighbor 
to use for a week, we have a bailment. If he borrows a 
bag of oats to feed his own horse, and is to return the same 
amount of like oats, we have a case of barter. 

The distinction between bailment on the one hand and 
barter or sale on the other is very important. If there is a 
bailment only of the property, and it is destroyed while in 
the bailee's hands without his fault, the bailor must stand 
the loss. If, however, there is a sale or a barter, the other 
party is to bear the loss. Sometimes it is difficult to decide 
whether a transaction is a bailment or a sale, but the dif- 
ficulty always comes from the facts being confused — some 
indicating a bailment and others a sale. The legal test to 
be applied, however, is perfectly simple and plain, and is 
this : Is the very same property to he surrendered hy the 
party in possession ivhich he received. If it is there is a 
bailment, otherwise there is not. 

It is not to be understood, however, that it is necessary 

parties to settle, the rule of law on this point. Probably it cost not 
much less than a thousand dollars. Should the student care to look 
up the case, he will find it reported under the title of Teal vs. Felton, 
in 1 Barb. (N. Y.), 512; 1 N. Y., 537 ; and 13 Howard (U. S.), 284. 



130 ESSENTIALS OF BUSINESS LAW 

that the property is to be delivered up by the bailee in the 
same form in which it was received. A cabinet-maker who 
receives a broken chair or table for the purpose of supplying 
a new leg, or arm, or leaf, is a bailee. So is a miller who 
receives wheat to be converted into flonr, or apples to be 
made into cider. Of course, if the miller agrees to deliver 
a certain number of pounds of flour for each bushel of 
wheat, or a certain quantity of cider for each bushel of 
apples, and not to deliver the product of the particular 
wheat or apples brought to him, the transaction is not one 
of bailment but of barter. 

192. Classification of bailments. — Perhaps the best 
classification is that suggested by Judge Story. He divided 
bailments into three classes, viz. : First, those which are 
for the sole benefit of the bailor. Second, those for the 
sole benefit of the bailee. Third, those for the mutual 
benefit of both parties. This classification is especially con- 
venient, because it corresponds with the degrees of care re- 
quired of bailees. For example, bailees of the first class 
need take but slight care of the property, while those of 
the second class are bound to take extraordinary care, and 
those of the third class ordinary care, as we shall explain 
more in detail hereafter. 

§ 2. Bailments for Bailor's Exclusive Benefit 

193. The special purpose of these bailments. — The 

earliest form of bailment is still the most frequent form of 
the class now under consideration. Its purpose is the safe- 
Tceeping of an article luitliout pay. A person leaves his 
coat or his book in his friend's room until it is convenient 
for him to take it away ; or he leaves a wagon or mowing- 
machine in his friend's barn, or a cow in the friend's pas- 
ture. In each case, if the owner is to pay nothing for the 
favor, the bailment is solely for his benefit. Less frequent 



BAILMENTS 131 

forms of this class appear when one undertakes to carry 
another s property or to do some W07'k upon it gratuitously, 

As a rule these bailments have the ass-ent of bailor and 
bailee, but not always. The finder of property who takes it 
into his possession is, as we have seen, a bailee by operation 
of law, and the bailment is for the bailor's sole benefit. No 
compensation for finding or keeping can be lawfully claimed 
by the bailee. All that he is entitled to is reimbursement of 
any reasonable expenditure by him in properly caring for 
the property. 

It is to be remembered, however, that one can not he 
made a gratuitous hailee ivithout his conserit. The finder 
of a roll of bills, or of a diamond pin, or a valuable watch 
may b'e certain that the property will be destroyed or stolen 
if he does not take it into his custody. Still, he is under no 
legal duty to become its bailee. Nor can one be made bailee 
of property by having it put into his possession without his 
knowledge. As soon as he discovers it he may rid himself 
of it, and if it is lost or injured in consequence, the owner 
has only himself to blame. 

194. Termination of these bailments. — A bailment of 
the kind we are now considering may be terminated hy the 
death or hankruptcy, or hy the voluntary act of either party. 

The death or bankruptcy of the bailee operates to end 
the bailment, because it is founded upon personal con- 
fidence in the bailee, and the assignee or executor may be 
one in whom the bailor has no confidence. Upon the bailor's 
death or bankruptcy the title to his personal property vests 
in the assignee or executor or administrator toward whom 
the bailee may decline to act gratuitously. The bailment 
may be ended by the voluntary act of either party whenever 
there is no contract between them; and ordinarily there is 
no contract in these cases. 

195. Duty of the bailee while the bailment continues. — 
While, as a rule, the gratuitous bailee is not bound by con- 



132 ESSENTIALS OF BUSINESS LAW 

tract to take or keep the property^, although he may hare 
promised to do so, because there is no consideration for 
his promise; yet, if he does take it into his possession, he 
comes under a legal duty to exercise care in accomplishing 
the purpose for which the bailment was made. The degree of 
care, as we have remarked already, is less than that required 
in other classes of bailments. It is generally descrihed as 
slight care — that is, such care as persons of less than com- 
mon prudence, who may still be called prudent, bestow on 
their own property of like kind in like circumstances. If 
the bailee has undertaken not simply to keep the property 
but to do some work upon it without charge, such as repair- 
ing a wagon, or doctoring a horse, or cleaning a watch, or 
carrying money or goods from one place to another, he is 
under a legal duty to do that work with at least slight care 
and skill. 

Of course, conduct that would satisfy the requirement 
of slight care and skill toward property of small value 
would fall far below that required toward property of great 
value. It might be no breach of duty for a gratuitous bailee 
to leave a horse or wagon in an unlocked barn in the coun- 
try, while it would be in the city. Such a bailee would not 
be exercising even slight care of a box of jewels if he kept 
them no more securely than he would a wheelbarrow. 

§ 3. Bail:\iexts for the Bailee's Sole Bexefit 

196. The bailee's duty. — This kind of bailment has its 
origin always in an agreement of the parties. The first 
duty of the bailee, therefore, is to do as he has agreed. If 
he borrows an article for a particular purpose he may use 
it for that purpose, but for no other. If he secures the 
loan of it by false statements as to the use he intends, to 
make of it he is guilty of fraud, and is absolutely liable for 
any harm befalling it while in his possession. Such is also 



BAILMENTS 133 

his liability when he uses it for a purpose materially differ- 
ent from that agreed upon. He becomes substantially an 
insurer of its safety. For example, A borrowed a yoke of 
oxen to use in plowing up a hedge, and used them in drawing 
stones instead. When he returned them one ox was lame. 
The court declared that he could not escape liability by 
showing that he used the oxen with the greatest care. When 
he used them in a way not agreed upon he took the risk 
of their being harmed. 

197. Must exercise extraordinary care. — Even when the 
bailee uses the article in accordance with his agreement, he 
is bound to exercise more than ordinary care. His duty 
as generally stated is to exercise the greatest care. Or, 
to put it in another way, he is liable for slight negligence. 
But he is not an insurer of safety. If a borrowed animal 
dies, or is injured, or is stolen, without any fault of the 
bailee, the loss falls on the lender. 

198. Bailee has no right to lend the property. — As a 
rule a person who loans property to another without pay 
does it because of his confidence in the borrower. Hence 
the bailee has no right to lend it or give the control of it 
to a third party. If he does he violates the confidence re- 
posed in him; he breaks the agreement, implied if not ex- 
pressed, under which he received the property, and is liable 
for any injury it sustains while the third party has it, with- 
out regard to the care or diligence of such party. Of course, 
this rule does not apply when the lender understands that 
the thing loaned is not to be used by the bailee personally, 
but by some one else, such as a member of his family or a 
servant. 

199. The bailor's duty. — While the duty of the gratu- 
itous bailee is very stringent, as we have seen, that of the 
bailor is very slight. Ordinarily he is under no legal duty 
to permit the bailee to take or to keep the property, al- 
though he has so agreed, for his agreement does not amount 



134 ESSENTIALS OF BUSINESS LAW 

to a contract — there is no consideration for his promise. 
True, it is possible for a gratuitous bailor and bailee to 
make a contract for the loan of the property, but this is 
rarely done.^ As a rule, therefore, the bailor may refuse 
to let the bailee take the property, even , after promising 
him the use of it, or he may call for it before the time has 
expired for which it was loaned without incurring any legal 
liability. It might be unneighborly conduct, but it would 
not be unlawful. 

Again, the bailor is not responsible for defects in the 
article loaned unless he knew of their existence. The mas- 
ter of a ship loaned a donkey engine to one who was load- 
ing freight. Owing to a defect it exploded, and injured the 
borrower; but, as the master did not know of the defect, 
it was held that the borrower had no cause of action against 
him. Had he been aware of the defect, however, it would 
have been his duty to notify the borrower of it. 

§ 4. Bailments for Mutual Benefit. General 
Principles 

200. Nature and classification of mutual benefit bail- 
ments. — The name of these bailments fairly indicates their 
nature, and shows how they diifer from those which we 
have been considering. A person sends a box of silver to s 
safe-deposit company and pays a dollar a month for storage. 
The transaction is a mutual-benefit bailment. The bailor 
finds it to his advantage to have the property stored in a 
safer place than his house, possibly in a fire-proof and spe- 
cially policed building ; and the bailee receives pay for keep- 
ing it. 

These bailments have been variously classified, and 

learned Latin names have been given to the different classes 

by some authors. We shall not follow the example of these 

writers, but shall deal with the subject under the following 

^See Appendix, p. 315. 



BAILMENTS 135 

titles : Pawn, pledge, or collateral security ; postmasters ; 
innkeepers ; the hired use of chattels ; hired services about 
chattels, including common carriage of goods ; common car- 
riers of passengers; telegraph and telephone companies. 

Before taking up these topics for particular considera- 
tion it may be well for us to have in mind certain general 
principles running through all of them, especially those 
relating to the duties of the bailee and the duties of the 
bailor. 

201. Duties of the bailee. — His first and most important 
duty is to guard the property with ordinary care. On the 
one hand he is not bound to be as careful as the gratuitous 
borrower, and on the other he must exercise more care than 
is required of the bailee who receives no benefit from the 
transaction. The rule, as generally stated, is this : the mu- 
tual-benefit bailee must use such, care as an ordinarily pru- 
dent person uses toward like property of his own in like 
circumstances. 

It will be noticed that the test is not the care which 
the bailee takes of his own property of like kind and in 
like circumstances, but the care taken by the ordinarily 
prudent person. If the bailee is sued for failure to use 
such care it is generally a question for the jury whether he 
has come up to this standard or not. 

In case the bailee undertakes to do something to the 
property for pay — for example, to repair a watch, to make 
a garment out of cloth furnished, or to carry goods — he 
is bound to do it with the skill and ability which are exer- 
cised by the ordinary, the average person engaged in such 
work. 

Perhaps, as in a previous section, attention should be 
called to the fact that the bailee's conduct, in order to come 
up to the proper degree of care or skill, must vary with the 
character of the property and surrounding circumstances. 
Conduct which would amount to ordinary care of a lumber 



136 ESSENTIALS OF BUSINESS LAW 

wagon might fall far below such care of an automobile. 
An express company may need to guard the bag of gold 
which it is transporting far more closely in one locality 
than in another; greater caution may be needed at night 
than in the daytime. 

202. Duties of the bailor. — These depend very largely 
upon the contract in each case. When the bailee hires the 
property, the bailor is bound to let him keep and use it dur- 
ing the time and in the manner agreed upon. If he does 
not he is liable in damages for breach of his contract. When 
the bailee is hired to do something to the property it is 
the bailor's duty to pay for the services. If the amount has 
been agreed upon he must pay that sum ; otherwise, the fair 
value of the services. 

When property is hired for a particular purpose it is 
the duty of the bailor to supply an article reasonably fit for 
that purpose. In the case of the donkey engine, referred 
to above, had the master of the ship received pay for its use 
he would have been under a duty to furnish an engine fit 
for the work, and probably would have been liable to the 
bailee for damages inflicted upon him by the explosion. 

§ 5. Pawn, Pledge, or Collateral Security 

203. Nature of this bailment. — It consists in the deliv- 
ery of personal property as security for a debt or some other 
engagement. Pawn is the oldest of the three terms, and is 
applied, at present, more frequently to petty dealings with 
licensed pawnbrokers, of whom we shall have a word to 
say hereafter, than to the larger transactions with banks 
and bankers, although as a legal term it is synonymous 
with pledge. Collateral security is sometimes used in a 
broader sense than the other two terms, and, in that sense, 
includes a chattel mortgage, which is not a bailment. But 
it is also used in the narrow sense of pledge. For example, 



BAILMENTS 137 

<^heii a borrower hands to his banker stocks, bonds, or mort- 
gages to secure payment of the debt, the transaction is 
spoken of indifferently as a pledge of the property, or as 
giving collateral security. 

We have said that a chattel mortgage is not a bailment. 
They differ in two important respects : First, a bailee does 
not get title to the goods. He obtains only a special interest 
in them. A pledgee, for example, has the right to retain 
the goods until the debt for which they are pledged is 
paid, but the pledgor is all the time their general owner. 
While a chattel mortgage passes the title to the mortgagee, 
although this title is to be passed back to the mortgagor 
upon ;^ayment of the debt. Second, in order to have a 
valid pledge, the pledgee must obtain possession of the 
property, while possession by the mortgagee is not essen- 
tial to the validity of a chattel mortgage, in the absence of 
some statute changing the common law on this subject. 

204. Possession by the pledgee. — While the pledgee must 
have possession of the property, it is not necessary that he 
take it upon his own premises or keep it in his actual cus- 
tody. Indeed, after taking possession of it he may leave it 
with the pledgor, as his agent, and still the pledge be valid. 
If, however, he gives up possession of it to the pledgor, 
even for a short time, the bailment is at an end, and the 
pledgor, if dishonest, may sell or pledge the property to 
some other person, and thus defeat the first pledgee of all 
right to or interest in it. 

Again, a valid contract for a pledge may be made with- 
out giving possession — nay, even before that which is to be 
pledged has come into existence. Such a contract, however, 
is not a bailment. That can not arise until the property — 
farm crops or animals, for instance — have come into exist- 
ence and also into possession of the pledgee. 

205. Eights of the pledgee. — In order that the pledgee 
have anv rights the transaction must be legal. If the debt 



138 ESSENTIALS OF BUSINESS LAW 

for which the property is pledged is a gambling debt, a 
usurious debt, or any other debt which the law of the place 
where it is made declares to be illegal and void, the pledgee 
can not hold the property against the pledgor's demand. 
The pledge of some things, such as the pensions, bounties, 
and pay of soldiers and sailors, is forbidden by law. A 
pledgee of such property acquires no interest in it or rights 
over it as against the pledgor. 

When, however, the pledge transaction is a valid one, 
the pledgee has the right to retain the property until the 
debt is paid. But he has no right to hold it as security for 
any other debt or liability. If the debt is not paid at the 
time agreed upon he may sell the property at public sale 
after due notice to the pledgor, and apply the proceeds, 
over and above the expenses of sale, to the debt. Very often 
the contract between the pledgor and pledgee gives the 
latter the right to sell at private sale, and without notice to 
the pledgor. While the pledgee may sell, he is not bound to 
do so, but may hold the property and sue the debtor. If he 
pursues the latter course and collects the judgment for the 
debt, his right to the property ceases, of course. 

206. Duties of the pledgee. — As pledge is a mutual- 
benefit bailment — the pledgor being benefited by the loan, 
made in consideration of the security, and the pledgee being 
benefited by having the property as security — the pledgee 
is bound to use ordinary care in guarding the property, 
but he is not an insurer of its safety. If any profit is de- 
rived from the pledge this must be accounted for by the 
pledgee, and if the pledgor pays his debt the profit or in- 
crease of the property belongs to him as the original se- 
curity does. Even if the pledgor fails to pay, this profit, as 
well as the original security, must be applied on the debt. 
This rule is of especial importance when stocks or bonds or 
animals are pledged. The interest or dividends received 
from the stocks and bonds, and the offspring of the animals, 



BAILMENTS 139 

form a part of the collateral security^ and are to be dealt 
with as such. 

207. Pawnbrokers. — Early in this section we referred to 
the fact that pawn is an older term than pledge or collateral 
security, and that, while it is legally synonymous with 
pledge, it is popularly limited to transactions with pawn- 
brokers. This class of' pledges has been the subject of un- 
complimentary legislation in England ever since the reign 
of Elizabeth, and in this country the pawnbroker's business 
is carefully regulated by State statutes or city ordinances, 
and in some of our commonwealths by both. 

Some of these statutes do not define a pawnbroker, but 
assume that the distinction between him and a money- 
broker or a banker is well known. Others define him as 
one whose business or occupation is to take by way of 
pawn, or pledge, or purchase on condition of selling the 
same back again, any goods, wares, or merchandise as se- 
curity for the repayment of money lent. He is often spoken 
of as " the poor man's banker," and many persons who fol- 
low this business are high-minded and worthy men. Our 
statutes and city ordinances proceed upon the theory, how- 
ever, that the great majority of pawnbrokers, especially in 
large cities, are ready to take unfair advantage of the 
needy borrower, and that not a few of them are in league 
with thieves. Accordingly, pawnbrokers are required to 
take out a license, to give a bond for the faithful perform- 
ance of the duties or obligations pertaining to their busi- 
ness, to keep books in which all -their transactions are en- 
tered, to permit inspection of their books by the proper au- 
thorities, to hold the property pawned for a year before 
selling, and to exhibit stolen goods upon demand to the 
owner or his authorized agent. The rate of interest which 
they may lawfully charge is generally fixed, and the manner 
in which the property shall be brought to sale if it is not 
redeemed is carefully prescribed. 



140 ESSEXTIALS OF BUSINESS LAW 

§ 6. Postal Bailmexts 

208. Their peculiar character. — It was stated in an 
earlier section that a postmaster is a bailee of mail-matter 
in his possession, and is liable as a bailee if he refuses im- 
properly to deliver it. Attention was then called to the 
fact that this bailment relation did not arise from a con- 
tract between the parties. It is tine that the sender of mail- 
matter does enter into a contract with the Government for 
its transportation. A person wishes to send a letter from 
ISTew York to San Francisco. He buys a postage stamp, puts 
it on the envelope, and deposits the letter in a post-box or 
hands it to a letter-carrier. By so doing he has accepted a 
standing offer of the Government, and thus closed a con- 
tract with it for the carriage of the letter to San Francisco, 
and its delivery to the person to whom it was addressed. If 
he had made a similar contract with an individual or an 
express company, such bailee would have been bound to use 
ordinary care and skill in carrying and delivering the letter, 
and if it had been lost, stolen, or destroyed because of the 
bailee's failure to use such care and skill, he would have 
been liable for it. 

The rights of the sender of mail against the Government 
are quite different. Although he has a valid contract, he 
can not sue the Government for any breach of it. The 
letter may be stolen by a postal clerk, or it may be lost 
through the negligence of some agent of the United States, 
still, neither the sender nor the one to whom it is sent 
can maintain a suit against the Government. Xor would 
the sender or the person to whom the letter was mailed 
have bettered his position had he registered it. Eegistra- 
tion of a letter or a package makes it easier to detect the 
dishonest or the careless agent, but it makes no difference 
in the liability of the Government, unless it assents. 

This non-liability rule seems a harsh one, especially 



BAILMENTS 141 

when coupled, as it is in this country, with statutes which 
secure to the Government a monopoly of carrying mail- 
matter. Under these statutes it is a penal offense for any 
one to establish an express, or in any manner to provide for 
the conveyance of letters or packets over any post-route 
established by law, including the route of a letter-carrier, 
in a town having the free-delivery system. It is also a penal 
offense for any one to send mail-matter by such private 
express or other conveyance. Notwithstanding the harsh- 
ness of this rule, it is rigidly enforced. The Government, 
although a bailee oft mail-matter for hire, does not permit 
itself to be sued for the loss, destruction, or theft, even when 
this results from the gross negligence or even the dishonesty 
of its agents. 

209. Liability of postal officers. — Not only is the Gov- 
ernment free from legal liability in the cases just men- 
tioned, but so is the Postmaster-General or any other 
postal official, unless his own act has caused or directly 
contributed to the loss. Of course, any postal official, no 
matter what his rank may be, who carelessly loses a letter 
or wilfully destroys or withholds it without authority of 
law, is liable in damages to its owner ; but the rule of lia- 
bility of a private principal for the acts of his agents, which 
we discussed in the chapter on Agency, does not apply to 
public officers. The reason for this is twofold. In the 
first place, the officer is not carrying on a business of his 
own, but the business of the Government. He is not the 
principal, and hence is not subject to the duty which rests 
upon the proprietor of a business, to see that it is carefully 
conducted. In the second place, his subordinates are not 
his agents, but are officers of the Government precisely as 
he is. They do not act for and represent him, but the Gov- 
ernment. 

210. Summary. — To sum up, then, postal bailments have 
some peculiar characteristics. The bailor makes his con- 



142 ESSENTIALS OF BUSINESS LAW 

tract with the Government^ but can not maintain an action 
for its breach, because the State does not allow itself to be 
sued. Any postal official having mail-matter in his pos- 
session is a bailee thereof, but he is liable only for his own 
acts and those which he orders or advises. In short, the 
postal bailee's liability is exceptionally small. 

210 (a). The non-liability of the Government under 
postal bailments has been modified by recent statutes. 
These provide that the Postmaster General shall make pro- 
vision for the indemnification of persons who have their 
letters or packages duly registered. Such regulations have 
been made and published. At first the indemnity was lim- 
ited to $10 on each package of first-class mail matter (Com- 
piled Laws of 1916, § 7105). Later the Postmaster-Gen- 
eral was authorized to increase it to $100 on each package 
(§ 7406). Still later the indemnity was extended to third 
and fourth class matter, for not more than $25 for each 
package (§ 7407). 

210 (b). Parcel-post. — In 1912, Congress instituted a 
new department in the postal service for the conveyance of 
third and fourth class mail in larger quantities and at lower 
rates than theretofore. (Ch. 389, L. 1912, 37 St. L. 557; 
Compiled Statutes of 1916, § 7624.) By the section last 
cited, authority is given to the Postmaster-General to make 
provision for the indemnification of shippers for shipments 
injured or lost. In accordance with the regulations made 
by the Postmaster-General, valuable domestic parcel-post 
mail may be insured against loss or damage, upon the pay- 
ment of three cents for value not exceeding $5 ; of five cents 
for value not exceeding $25; of ten cents for value not 
exceeding $50; of 25 cents for value not exceeding $100. 
Upon presenting such mail properly packed and addressed, 
the shipper upon paying the postage and insurance fee 
receives a receipt in the following form: 



BAILMENTS 143 

Receipt for Insueed Mail 

No 

This receipt represents a parcel insured, and 

must be presented in the event of application pee paid cts. 

for indemnity which must be made within six (Postmark.) 

months from date of mailing. The sender 
should write the name and address of the ad- 
dressee on the back hereof. 

Was inquiry made as to contents and packing ? 

POSTMASTER, by 

Parcel-post matter may be sent "C.O.D." from one 
money-order post-office to another for an amount not ex- 
ceeding"$100. By this means, a parcel may be sent to the 
bnyer from whom the postal agent collects the price and 
remits it to the seller, for a fee varying from 10 to 25 cents. 

210 (c). United States not suable. — While the govern- 
ment thus engages in carrying goods, it does not permit 
itself to be sued as a common carrier. It engages to in- 
demnify the shipper against injury or loss, but to do this 
out of postal funds and by proceedings regulated by the 
postal department, under special statutory provisions. It is 
not liable to actions at law on the bailment contract for 
the carriage and delivery of the package. 

Even before the statutes gave the right of indemnifica- 
tion in the case of registered or insured mail, and when the 
government was under no legal obligation to . the owner of 
injured, lost or stolen mail, it was accustomed to investigate 
losses and to seek to recover and restore to the owner the 
value lost, or so much thereof as was possible. The govern- 
ment now recognizes a legal responsibility to the limited 
amounts named above. Moreover, it uses its utmost en- 
deavor to find and restore a lost piece of mail, and if the 
loss is not caused by a casual disappearance, but is due to 
the dishonesty or unfaithfulness of its servants, compels 
restitution from the culprit and from those responsible for 



144 ESSENTIALS OF BUSINESS LAW 

his faithful service. At least such is the statement of a 
distinguished Attorney-General of the United States. (23 
Opinions of Atty.-GenL, 476, 478.) 

210 (d). United States may sue. — Postal officials and 
agents are required to give bonds for the faithful perform- 
ance of their duties. In case mail matter is lost through 
the dishonesty or unfaithfulness of one of these persons, the 
United States may sue the sureties on the bond. In such 
a case, its recovery is not limited to the amount it is liable 
to pay the owner of the lost mail. It can recover the entire 
value of the property, if the bond is for that amount. After 
reimbursing itself, it will pay the balance to the owner. In 
a recent case, a bank sent three packages of bank notes by 
registered mail. They were stolen by a postal clerk and 
more than $3,000 thereof put into circulation and thus lost 
to the bank. The government paid $150 to the bank, under 
its indemnification agreement, and sued the surety on the 
dishonest clerk's bond for the full amount of the penalty 
named in the bond, which was $1,000. The surety insisted 
it should pay only $150; but the court held that it was 
liable for the full penalty of $1,000. Even that did not 
cover the loss of the bank. The court quoted with approval 
from the Attorney-Generars opinion, already referred to, 
this language: ^'The Government is morally bound to re- 
cover from a dishonest official the entire amount of his 
embezzlement, and, of course, is equally bound in conscience, 
as the statutes recognize, to return to the owner of the 
registered letter the entire amount thus recovered from its 
dishonest employer or from his surety." 

§ 7. Innkeepers 

211. Definition. — An inn, as that term is used in Eng- 
lish common law, is a public house of entertainment for 
travelers. Its public character is often indicated by a 



BAILMENTS 145 

sign, but a sign is not necessary to an inn. It is to be dis- 
tinguished on the one hand from the lodging-house, and 
on the other from the restaurant or the saloon. The inn- 
keeper undertakes to provide for the traveling public both 
lodging and food. In this country, tavern and hotel are used 
interchangeably with inn. Tavern was formerly the ordi- 
nary designation, but at present hotel is used more fre- 
quently than either of the other terms. In this section 
we shall use inn rather than tavern or hotel, because it is 
the term generally used in statutes and in judicial decisions. 
Perhaps it should be hoted that tavern, in England, is not 
synonymous with inn or hotel, but with restaurant or re- 
freshment room. It is not necessary that a house be kept 
open for the entertainment of the public throughout the 
year in order to be an inn, as is seen in the case of a hotel 
in a summer or a winter resort. On the other hand, a 
private house does not become an inn by being thrown open 
to the public for a few days during a festival, a fair week, 
or other special occasion. Oftentimes a public house is 
conducted on what is known as the " European plan." It 
provides lodging for its guests, and gives them the option 
of taking meals in the hotel or elsewhere. Such a house 
is an inn. 

212. Whom must the innkeeper receive? — As he is en- 
gaged in a sort of public employment, the common law made 
it his duty to receive every traveler or sojourner who applied 
for entertainment and was ready to pay for it, provided the 
house was not full and the applicant was fit to be received. 
Such is still the rule. The innkeeper has no right to dis- 
criminate between guests, taking some and turning away 
others, as whim or personal prejudice may dictate. So long 
as he has accommodations he must take all fit comers, and 
treat them fairly. He has the right, however, to charge 
more for some rooms than others, and is not bound to give 



146 ESSENTIALS OF BUSINESS LAW 

a guest his pick of rooms^ even among those of the same 
class. 

An innkeeper who refuses to receive^ or^ after receiving, 
turns out of his house a guest^ without legal excuse, is 
liable for such damages as his act causes the guest, and 
may be indicted and punished therefor criminally. In 
some of our States, statutes have been passed making it a 
misdemeanor for an innkeeper to discriminate against 
guests on account of race, color, or creed, and subjecting 
him to heavy penajties for such discriminations. 

^\e have seen that the law does not force an innkeeper 
to receive unfit persons as guests. Accordingly, he may 
reject drunken, disorderly, or openly vicious persons; also 
those coming from infected districts, whose presence would 
drive away other guests; as well as persons who insist upon 
bringing their dogs to share with them the corridors and 
rooms of the hotel. Wliether he may lawfully reject or turn 
away one whose table manners are unpleasant to others 
seems to depend upon the degree of their vulgarity. A 
learned English chief justice once ruled that a guest could 
not be turned away simply because " he was in the habit of 
reaching across other guests at table, and of taking pota- 
toes and broiled bones with his fingers.^^ This, said the 
judge, was not such a " degree of want of polish as would, 
in point of law, warrant " the innkeeper in excluding the 
guest from the inn. 

213. Treatment of sick guests. — An innkeeper is not 
bound to turn his house into a hospital. If a guest falls 
sick, " mine host " may insist upon his leaving the inn, 
especially if the disease is contagious; but this exclusion 
must be carried out in a reasonable and humane manner. 
A few years since a Pennsylvania innkeeper turned a sick 
guest out of his house and left him on the pavement in a 
pelting storm, from which exposure he died. Such conduct 



BAILMENTS 147 

the jury found was indefensible, and rendered the landlord 
liable to damages for the guest's death. 

214. Innkeeper's liability for personal injuries to guest. 

— Something more than three hundred years ago the court 
of King's Bench in England declared that "if the guest be 
beaten in the inn the innkeeper shall not answer for it," 
giving as its reason that " the innkeeper ought to keep the 
goods of his guest but not his person." Such is not the 
modern doctrine in this country. Not only is the innkeeper 
liable for personal injuries inflicted by himself or by his 
agents and servants within the scope of their employment, 
but, in some cases, for those inflicted by other guests. Here, 
again, Pennsylvania furnishes a recent decision in point. 
Two boys became intoxicated in the defendant's tavern. 
One of them pinned a piece of paper to the other's coat 
and set fire to it. As a result the victim of the joke was 
badly burned. The court held that if the defendant saw 
what was going on and failed to protect the plaintiff, or if 
he was guilty of making drunk the boy who pinned and 
fired the paper, he was liable for the damages sustained by 
the plaintiff, and this general rule was laid down: " Where 
one enters a saloon or tavern opened for the entertainment 
of the public, the proprietor is bound to see that he is 
properly protected from the assaults or insults, as well of 
those who are in his employ as of the drunken and vicious 
men whom he may choose to harbor." 

An innkeeper is also answerable for injuries sustained 
by his guest because of the unsafe or unsanitary condition 
of the inn, or because of unwholesome food. If an innkeeper 
knows that a room has been occupied by a guest sick with 
smallpox he is bound to have it disinfected. He is also 
bound to exclude persons whom he knows or has reason 
to suspect are suffering from contagious diseases. If he is 
negligent in either of these respects, or in keeping his 
premises in a reasonably safe condition, or in providing 



148 ESSENTIALS OF BUSINESS LAW 

wholesome food and drink, he is liable for damages due to 
his negligence. 

215. Innkeeper's liability for guest's property. — This is 
much more severe than his liability for the guest's person, 
and is substantially that of an insurer. He is bound to 
keep the property of a guest safely. It is no defense for 
him at common law that it has been stolen by burglars, or 
destroyed by a mob or an incendiary fire. Unless he can 
show that its loss or injury is due to an act of God, or of 
the public enemy, or the neglect or fraud of the guest, he 
must pay for it. At least, such is the common-law rule in 
England and in most of our States. A few of our courts, 
however, have favored a less rigorous rule, which exempts 
the innkeeper from liability upon proof that the loss was 
not due to any fault on his own part or on that of his agents 
or servants. The common-law rule originated at a time 
when innkeepers were frequently in league with thieves and 
highwaymen — a period which is vividly pictured by Charles 
Eeade in The Cloister and the Hearth. While the modern 
hotel and the highways leading to it are not infested with 
thieves and robbers, as were those of three or four centuries 
ago, the great majority of modern judges have enforced the 
old rule rigorously. Chief-Justice Shaw, of Massachusetts, 
declared that " it was founded on the expediency of throw- 
ing the risk on those who can best guard against it,^' and 
Judge Porter, of the N'ew York Court of Appeals, asserted 
that " its abrogation would be the removal of a safeguard 
against fraud, in which almost every citizen has an imme- 
diate interest." 

216. Statutory modification of innkeeper's liability. — 
The rule has been modified to some extent by legislation 
both in England and in this country. While statutes on this 
subject differ in matters of detail, their main purpose is 
to relieve the innkeeper from his common-law liability for 
[money, jewelry, and the like belonging to the guest, which 



BAILMENTS 149 

are not delivered to him for safe-keeping. To bring him- 
self within the protection of these statutes, he must gen- 
erally provide a safe place for such valuables, and must 
post notices in the prescribed places and form. In some 
states the legislature has exempted him from liability for 
property destroyed by an incendiary fire. As a rule, these 
statutes have been construed very strictly, and the inn- 
keeper, who has failed to observe their requirements in any 
respect, has lost the benefit of them altogether. For exam- 
ple, the English statut,e required the innkeeper to post a 
plainly printed copy of the first section. That section con- 
tained the words " wilful act, default, or neglect." It was 
held that an innkeeper whose posted copy omitted the word 
" act," had not complied with the statute, and was not en- 
titled to its benefit, but remained subject to his common- 
law liability. 

217. The common-law exceptions to liability. — As was 
stated in a preceding paragraph, the innkeeper is not liable 
for the goods of a guest which have been injured or de- 
stroyed by the act of God, by the public enemy, or by the 
fraud or fault of the guest. 

The phrase " act of God " is not a very happy one, and 
has been criticized as irreverent. A distinguished lawyer 
of a former generation, David Dudley Field, proposed to 
substitute for it " irresistible superhuman cause." It has 
been defined by an English chief justice as follows : " Such 
a direct and violent and sudden and irresistible act of 
nature as could not by any amount of ability have been 
foreseen, or if foreseen, could not by any amount of human 
care or skill have been prevented." This definition is too 
narrow. It is not necessary that the act could not possibly 
have been foreseen or prevented. It is enough that it could 
not have been foreseen or prevented by the exercise of 
reasonable diligence, care, and skill on the part of the inn- 
keeper. Sometimes " act of God " has been treated as 



150 ESSEXTIALS OF BUSINESS LAW 

synonymous Avitli inevitable accident. Bnt tliey are quite 
different. A fire, caused by lightning, is due to an act of 
God, but one resulting from a defective flue, or from the 
explosion of a steam-boiler, without carelessness on the 
part of the innkeeper or his agents or' servants, is due to 
inevitable accident. For the former he is not liable, for 
the latter he is. Other examples of an "' act of God '^ are 
earthcpiakes. tornadoes, unprecedented floods, and sudden 
death due to natural causes. 

'' The public enemy *' is another phrase bearing a tech- 
nical meaning in the law of bailments. It does not include 
every one who would be called an enemy of the public in 
popular speech. Thieves, roljbers, or a mob are not within 
its scope. It applies only to those engaged in war against 
the Government. It includes pirates, for they are at war 
with every organized state, and in this country it has been 
held to include marauding Indians on the frontier, for the 
Indian tribes are not citizens and are recognized as having 
a semi-independence. 

The third exception noted above — loss due to the guest^s 
fault — is illustrated by the following cases : A guest knew 
that his horse had the vicious habit of pulling when hitched 
with a halter. He said nothing about tliis to the innkeeper 
or his servants. The horse was hitched in the ordinary way, 
and during the night in a fit of j3ulling killed himself. It 
was held that the horse's death was due to his owner's fault, 
in not disclosing the animal's vicious habit, and that the 
innkeeper was not liable for the death. In another case 
the guest had more than six thousand dollars" worth of 
jewelry in a handbag, which he left unlocked in the coat- 
room without notifying the innkeeper of the contents. The 
Supreme Court of the United States declared that the loss 
of the jewelry was to be charged to the negligence of the 
guest unless he could show that the innkeeper or his servants 
were actually at fault in guarding the property. 



BAILMENTS 151 

218. WhO' is a guest? — The extraordinary liability of 
the innkeeper which we have been considering is limited to 
guests. It becomes necessary^ therefore, to know what con- 
stitutes a guest. Whether a particular person is a guest 
at an inn is not a perplexing question ordinarily; and yet, 
in some cases the courts have found great difficulty in an- 
swering it. Of this class was the suit brought by Mrs. 
Hancock against the proprietor of a New York hotel for 
four thousand dollars' worth of jewelry stolen from her 
room. The defense was that plaintiff was a boarder and 
not a guest. It appeared that plaintiff, with her husband 
and family, had been living at the hotel for some months 
when the theft occurred. Before going there her husband. 
General Hancock, of the United States army, had asked and 
received from the defendant special terms for the rooms 
which they occupied, and had told the defendant that they 
expected to remain in the rooms until the following summer, 
provided everything was satisfactory and provided he was 
not sooner ordered away on military duty. Upon this state 
of facts the majority of the Court of Appeals held that 
General Hancock and his family were guests, although 
three of the judges were of the opinion that they were 
boarders. 

This decision has been criticized, but it appears to be 
sound. A person is none the less a guest because he en- 
gages a room in advance at a fixed price per day or week. 
If his stay is indefinite, and may be terminated at any 
time; if he comes to the inn as a temporary sojourner or 
traveler or wayfarer, and there receives lodging and enter- 
tainment, he is a guest. If, on the other hand, he takes up 
his residence at the inn for a fixed period and at agreed 
rates, he is a boarder. Accordingly, the proprietor of a 
hotel may have the relation of innkeeper to the occupants 
of some of his rooms, and of boarding-house keeper to 
others. For the property of his guests his liability is prac- 



162 ESSENTIALS OF BUSINESS LAW 

tically that of an insurer. For the property of his boarders 
he is not liable, unless its loss or injury is due to his negli- 
gence. 

It was formerly thought, in England, that one could 
not be a guest at an inn located in the town where he lived, 
for such an one could not be considered a traveler; but that 
view has been discarded both there and in this country. 
A townsman, as well as a man from afar, who puts up at an 
inn, as a temporary sojourner to enjoy its hospitality, is 
a traveler and a guest. 

219. Rights of the innkeeper. — Some of these have been 
referred to, such as his right to turn away unfit persons, and 
to demand pay or security in advance. In addition to 
these is the very important right of lien on the property 
which the guest brings to the inn. Under this right the 
innkeeper may hold as security for the guest's bill not only 
such things as are owned by the guest, but things which he 
has borrowed or even stolen, provided the innkeeper hon- 
estly supposed they belonged to the guest when they were 
brought to the inn. This lien, or right to hold the goods, 
will be lost if the innkeeper knowingly and willingly or care- 
lessly lets the property go from his premises. It is what is 
known as a possessory lien — that is, it exists only while the 
innkeeper has the property in his possession. At common 
law it gave to the innkeeper no right to sell the property ; it 
gave him only the right to hold on to it. Modern statutes, 
however, in many States authorize him to sell the property 
and apply the proceeds upon the unpaid bill. 

§ 8. The Hired Use of Chattels 

220. A common kind of bailment. — Very few persons 
go through life without becoming a party to this form of 
bailment, for it includes every case of letting or of hiring of 
personal property. One who hires a bicycle for an hour 



BAILMENTS 153 

or for any period of time, or who pays for the use of a 
book, whether taken from a loan library or from an indi- 
vidual; or who hires a costume for a fancy-dress ball, or a 
horse and carriage for a drive, is a bailee. Such a bail- 
ment is beneficial to both parties — the bailee is benefited 
by having the use of the property, while the bailor is bene- 
fited by the pay which he receives. The general duties of 
the parties to this kind of bailment were stated in the fourth 
section of this chapter, and need not be repeated here. Per- 
haps a few words shoul-d be added concerning the liability 
of a bailee who uses the property for a different purpose 
from that for which it was hired. 

221. The bailee may be liable for conversion. — A person 
hires a horse and carriage to drive from Cazenovia to De 
Euyter, a distance of thirteen miles. Instead of making 
this trip he drives in quite a different direction to Syracuse, 
which is several miles farther away. This is an act of con- 
version, and the liveryman may sue the hirer and recover the 
full value of the horse and carriage. Instead of this he may 
receive the property from the hirer and sue him for the 
difference between its value when it was let and when it was 
returned. The liveryman rarely exercises either of these 
rights, unless the property has been injured while in posses- 
sion of the hirer, or unless the contract of bailment can not 
be enforced. Examples of such contracts are those made by 
a minor, or by an adult for Sunday pleasure driving in 
States where such driving is illegal. If the hirer sets up 
his infancy or the illegality of the contract as a defense he 
can defeat the bailor if the suit is brought on the bailment 
contract. But if the hirer has been guilty of a technical 
conversion, neither his infancy nor the illegality of the 
contract under which he got possession of the property, will 
save him. In such a case the liveryman or other bailor may 
ignore the contract and sue the bailee for his wrongful act 



154 ESSENTIALS OF BUSINESS LAW 

in using the property in a way to which the bailor had not 
assented. Any snch wrongful act amounts to a technical 
conversion^ for the hirer of property may convert it without 
using it up, or selling it, or destroying it. He may convert 
it by acting in defiance of the bailor^s ownership ; and when 
a person who has hired a horse to drive to one place drives 
to a different and more distant place, he assumes dominion 
over it, in defiance of the bailor, as truly as though he had 
taken the horse from the stable for the drive, without the 
bailor^s consent. In other words, he converts the horse to 
his own use, and may be sued in tort for its value. 

§ 9. Hired Services about Chattels, other thait the 
Services of CoMMOiSr Carriers 

222. Why this class of bailments is separated from com- 
mon carriage. — We have made this separation because the 
liability of common carriers is much greater than that of 
other persons who do w^ork upon or about chattels for pay. 
The bailees, dealt with in this section, are bound to use 
ordinary care, diligence, and skill in the performance of . 
their bailment contracts, and are not required to use more 
unless they have specially engaged to use more. 

The services to be rendered by these bailees are of vari- 
ous kinds. They may consist in storing and guarding prop - 
erty, as in the case of warehousemen, or in receiving and 
temporarily keeping it upon a wharf or dock, as in the case 
of wharfingers; or in keeping and feeding animals in pas- 
tures or stables; of in receiving goods for sale, as an auc- 
tioneer or factor; or in receiving checks, bills of exchange, 
and other negotiable paper for collection, as a banker; or 
in receiving goods to be forwarded by a common carrier, as 
in case of forwarders; or in receiving grain to be ground, 
or apples to be made into cider; or in receiving a watch or 
any other article to be cleaned or repaired. Many of the 



BAILMENTS 155 

commonest businsss transactions, it will be observed, are 
included in this class of bailments. 

223. Warehousemen and warehouse receipts. — The 
warehousing of goods has become a very important branch 
of business, and assumes a great variety of forms. It in- 
cludes the huge grain-elevators of our railroad centers and 
shipping ports; the splendid fire-proof buildings and the 
handsome equipment of safe-deposit companies, as well as 
the great structures for the cold storage of fruits, meats, 
and other food-products. Upon his receipt of property for 
storage the warehouseman issues a document called a ware- 
house receipt. The following is a sample : 

FARMEES' AND MERCHANTS' ELEVATOR, No. 546 

Litchfield, Minn., Oct. 31, 1895. 
Received in store of N. M. Pearson, ten hundred and seventy- 
seven bushels No. 1 wheat, which amount, and same quality by 
grade, will be delivered to the owner of this receipt, or his order, as 
provided by law and the rules of the railroad and warehouse com- 
mission of Minnesota, upon surrender thereof and payment of law- 
ful charges. This grain is insured for the benefit of the owner. 

A. J. Barry, Lessee. 

By statute in many of our States these receipts have been 
declared to be negotiable. Accordingly the holder of a 
warehouse receipt may sell the property described in it, 
and by indorsing and delivering it, give all his rights in the 
property to the purchaser, as fully as though he had actually 
delivered the property itself. For such purposes the re- 
ceipt is considered the symbol of the property. Statutes 
have also been passed making it a crime for a warehouseman 
to sell, dispose of, or deliver any property represented by a 
warehouse receipt, without the authority of the owner and 
the return of the receipt. 

223 (a). Uniform Warehouse Receipt Act. — This has 
been adopted (1918) by forty-one states and territories, and 



156 ESSENTIALS OF BUSINESS LAW 

by Congress for the District of Columbia. While, in the 
main, it is a codification of common law rules, some of its 
provisions are intended to modify those rules, as we shall 
presently see. 

223(b). Who is a warehouseman? — He is defined as ^^a 
person lawfully engaged in the business of storing goods for 
profit.'^ Hence a taxi-cab company is not a warehouseman 
of a lathe stored with it for mutual benefit of itself and of 
the owner. It was a case of ordinary bailment, and the 
company had no lien on the lathe for storage, as it would 
have had as a warehouseman (§§ 27-29 of Act). If the 
company had taken an automobile for storage, it would have 
been a warehouseman thereof. A safety deposit company is 
a warehouseman of the property stored in its boxes, as well 
as of packages which it stores. A railroad company be- 
comes a warehouseman of goods after their transportation 
has ended, and its liability changes from that of insured 
to liability for ordinary negligence. It is a warehouseman, 
too, of articles which it checks and holds in its parcel room 
and for which it gives a printed coupon. 

223 (c). The receipt to be given by a warehouseman 
need not be in any particular form, though its substance is 
prescribed (§2), and the w^arehouseman is prohibited from 
inserting other terms or conditions which are contrary to 
the provisions of the act, or which impair his obligation to 
exercise that degree of care in the safe-keeping of the goods 
which a reasonably careful man would exercise in regard 
to similar goods. (§3) A receipt is non-negotiable when 
it states, that the goods will be delivered to the depositor, 
or to any other specified person. (§ 4) It is negotiable 
when it states that the goods will be delivered to the bearer 
or to the order of any person named in the receipt. (§5) 
The alteration of a receipt does not excuse the warehouse- 
man from liability thereon, if it is immaterial, or is au- 
thorized, or is made without fraudulent intent. 



BAILMENTS 157 

223 (d). Negotiability of receipt. — At common law, 

warehouse receipts were not negotiable, though they stated 
that the goods were deliverable to bearer or to order. Even 
under statutes which declared them negotiable, our courts 
held, as a rule, that they were not put on a footing of bills 
of exchange (which we shall consider in a later chapter), 
but their transfer should have the same legal effect that the 
transfer of the goods, represented by them, would have. By 
the Uniform Act, however, they are declared fully nego- 
tiable. A warehousemlin is entitled to deliver the goods 
to the bearer or indorsee of such a receipt ; and, for his own 
protection, must take up and cancel the document upon 
delivering the goods (§§ 11, 12). If a receipt is to bearer, 
or if to order and properly indorsed, it may be negotiated 
by the owner, or by any person to whom possession or cus- 
tody of the receipt has been entrusted. It thus becomes 
possible for a mere servant, who has no authority from the 
owner to transfer the receipt or the goods, to give a perfect 
title to both, by turning over the receipt in payment of his 
individual debt or for cash which he uses for his own pur- 
poses (§§ 41 and 58). 

Again, by the negotiation of such a receipt, the owner 
warrants that it is genuine, that he has a legal right to 
negotiate it, that he has knowledge of no fact impairing its 
validity or worth, and that he has a right to transfer title 
to the goods (§ 44). His indorsement of the receipt, how- 
ever, does not make him liable for any failure of the ware- 
houseman or of previous indorsers to perform their con- 
tracts (§ 45). 

Issuing receipts for goods not received, or receipts con- 
taining any false statement, or duplicate receipts without 
marking them as such, or receipts for goods of which the 
warehouseman is the owner, but which do not state this 
fact, is a criminal offense. It is also a crime to deliver 
goods without obtaining the negotiable receipt therefor, as 



158 ESSENTIALS OF BUSINESS LAW 

it is to negotiate a receipt for goods whicli the party does 
not own, or which are mortgaged (§§ 50-55). 

223 (e). Warehousemaii's lien. — This was recognized 
and enforced by common law courts, as one established by 
commercial nsage. By the Uniform iict it is defined and 
regulated with care. It covers all goods deposited with the 
warehouseman or the proceeds thereof in his hands, for all 
lawful charges for storage and preservation, and for lawful 
expenses in relation to them. The goods must have been 
owned by the depositor, or he must have been so entrusted 
with the possession of the goods that a pledge of them by 
him at the time of deposit to one who took them in good 
faith for value would have been valid (§ 28). The lien is 
lost by surrendering possession thereof or by improperly 
refusing to deliver the goods upon a timely demand (§ 39). 

§ 10. CoMMOx Careiees of Goods 

224. Definition and general duty. — A common carrier 
of goods is one who holds himself out to the public as ready 
and willing to transport personal property for hire from 
one place to another, for all who choose to employ him. It 
■Rdll be observed that a person is not brought within this 
class of bailees simply by engaging in the transportation of 
goods. So long as his business is a private one; so long 
as he undertakes to carry goods only at such times, for such 
persons, and on such terms as he may choose, he is not a 
common carrier. The law does not force any one into this 
class of bailees, and it permits any one to retire from its 
ranks. 

When, however, one voluntarily enters this class, he 
limits to some extent his liberty of action. He takes upon 
himself a public occupation, the conduct of which he is not 
allowed to control entirely. The law steps in and imposes 
upon him certain obligations. Of these, the first and most 



BAILMENTS 159 

general, is the duty of serving the public fairly and hon- 
estly. He is bound to receive and carry for all persons with- 
out discrimination. If he violates this duty he makes him- 
self liable to pay damages to any one injured thereby. 
Having held himself out as ready and willing to carry for 
all, his refusal so to do without sufficient excuse is treated 
as a sort of fraud upon every one whose goods are refused. 
Examples of common carriers are very numerous. They 
are supplied not only by the great railroad, express, and 
steamship companies, l)ut by the masters of ships, the 
owners of stage-coaches, of trucks, and the like, who en- 
gage in the public occupation of transporting goods for hire. 

225. Excuses for refusing to carry. — A common carrier 
rarely holds himself out as ready to carry any and every kind 
of goods. Unless he does, he may safely decline to accept 
such as are of a different character from those which he 
publicly announced he would carry. For example, a railroad 
or stage-coach company, although a common carrier of ordi- 
nary freight, is not bound to receive and transport money or 
dogs. Again, the carrier may refuse to take the goods for 
transportation unless a fair and reasonable payment is 
made in advance. So he may refuse if his ship, or his cars, 
or his wagon is full. N'or is he bound to increase his trans- 
portation facilities, so as to be able to take everything which 
is tendered. Still again, he is excused for refusing articles 
which are improperly packed or prepared for carriage, or 
which are dangerous to life or property. 

226. Common carrier's liability for goods received. — Not 
only did the common law impose upon this class of bailees 
the obligation to accept and carry all goods delivered to 
them (save in exceptional cases as above explained), but it 
bound them " to answer for the goods against all events 
but the act of God, or the public enemy, or the fault of the 
bailor." It was no defense to the common carrier that 
the goods were destroyed by a fire for which neither he 



160 ESSENTIALS OF BUSINESS LAW 

nor his servants were responsible, or by a mob, or were 
taken from him by highway robbers. By receiving them in 
his capacity of common carrier he became virtually the 
insurer of their safety. This rule was based upon consid- 
erations of public policy. Said Lord Mansfield, in a case 
where a common carrier was held ' liable for a quantity of 
hops, destroyed by a purely accidental fire while in his pos- 
session : " To prevent litigation, collusion, and the neces- 
sity of going into circumstances impossible to be unraveled, 
the law presumes against the carrier, unless he shows it was 
done by the king's enemies, or by such act as could not 
happen by the intervention of man, as storms, lightning, 
and tempests. If an armed force come to rob the carrier 
of the goods he is liable. The true reason for this is, for 
fear it may give room for collusion, that the master may 
contrive to be robbed on purpose and share the spoil." 

227. Exceptions to the rule of liability. — Two of these 
exceptions — the act of God and the public enemy — were 
sufficiently explained in the section on Innkeepers. Per- 
haps a few words should be added about the third exception 
— the fault of the bailor. This includes cases where the 
loss or injury is due to some defect in the property, as 
when perishable fruit is shipped at an improper time or 
in an improper manner; or an animal hurts or kills itself 
by reason of some vicious habit; or goods are destroyed by 
spontaneous combustion or explosion; or liquor is spoiled 
because of its natural tendency to effervescence or acidity 
during transportation. It also includes cases where the 
property is delivered to the wrong person owing to the im- 
proper directions of the bailor. Still another class of cases 
coming within this exception are those where the shipper 
has concealed the true character of the property for the 
purpose of getting lower rates. The frequency with which 
these cases appear in the reports shoAvs that deception of 
this sort is quite conmion. Here are a few samples : Money 



BAILMENTS 161 

was concealed in a bag of hay in one case, in another in a 
quantity of tea ; a diamond ring was wound with cotton and 
tied in a paper bag; a quantity of silks, satins, laces, and 
valuables was packed in a basket tied around with a rope, 
and shipped as household goods. In all of these cases the 
carrier was relieved from his common-law liability as in- 
surer, because of the deception practised upon him by the 
shipper — a deception which naturally lessened the care and 
diligence with which -he would guard the property. 

228. When the carrier's liability begins. — As soon as 
the property is delivered to and accepted by the common 
carrier for transportation, his extraordinary liability begins. 
The only difficulty is in determining when it is so delivered. 
If the carrier is accustomed to send for the property, as is 
the practise of express companies in cities and large villages, 
a delivery is made when the property is taken by the au- 
thorized agent. It is also made when the property is taken 
by one accustomed to receive goods at a particular place, 
such as the office, dock, or station-house of the carrier. But 
if a package is handed to an express agent on the street, 
and the agent is authorized to receive such articles only in 
the office, a delivery to the carrier is not made. 

At times the carrier receives goods which he is to store 
until it suits the convenience of the bailor to have them 
started on their journey. In such cases he receives and 
holds them as warehouseman and not as carrier, and his 
liability is that of an ordinary bailee for hire. If they are 
burned or stolen, without negligence on his part, the owner 
and not he must bear the loss. The carrier, however, does 
not become a warehouseman of goods delivered to him for 
immediate transportation, by keeping them in his freight- 
house until it suits his convenience to put them aboard his 
cars or ships or wagons. A case of that kind was recently 
decided by the New York Court of Appeals. A quantity of 
hay was delivered at the freight-house of a railroad com- 



162 ESSENTIALS OF BUSINESS LAW 

pany^ ready for immediate transportation, bnt as the com- 
pany was short of cars it was left there nntil a car could be 
obtained, when the shipper was to load it into the car. While 
thus in the freight-house it was destroyed by a purely acci- 
dental fire. The railroad company contended that it was 
a warehouseman and not a carrier of the hay, and hence not 
bound to pay for it. But the court decided against it, 
saying: "If a common carrier receiyes goods into his own 
warehouse for the accommodation of himself and his cus- 
tomers, so that the deposit there is a mere accessory to the 
carriage, and for the jDurpose of facilitating it, his liability 
as a carrier will commence with the receipt of the goods,^^ 

229. Termination of carrier's liability. — This depends 
yery much upon the usages of the carrier. An express com- 
pany, especially in cities and large yillages, is accustomed to 
deliver at the residence or place of business named on the 
package. Until such deliyery is made or excused, its car- 
riers' liability continues. Carriers by water or rail, how- 
ever, have a different usage. As a rule they deliver only at 
the dock, wharf, or station of the town to which the goods 
are sent. Upon their arrival the carrier generally sends 
a postal card or other notice to the consignee, telling him 
where they are, and the time within which he must take 
them away. If they are not removed within such period 
the carrier's liability changes to that of warehouseman. In- 
deed, in some of our States it is held that he need not give 
notice of arrival in order to terminate his liability as car- 
rier; that it ends as soon as the goods are removed from 
the car or the vessel, and that thereafter he holds them as 
warehouseman. 

Property is frequently tendered to a carrier for trans- 
portation to some point not on his line. He is not bound, 
at common law, to receive it; but as a rule he is only too 
glad to carry it as far as he can, and deliver to a connecting 
carrier. The liability which he assumes upon receiving it 



BAILMENTS 163 

varies with the contract which he makes. If he undertakes 
to deliver it at its final destination he will be liable as 
carrier until it reaches that destination. In England and 
in a few of onr States such an undertaking is inferred 
whenever he receives without objection the goods marked 
for a place beyond his own line. The general rule in this 
country is^ however, that such an undertaking is not to be 
inferred from the mere reception of the goods; and unless 
the first carrier receives pay for the whole journey, or in his 
bill of lading or shipping receipt agrees to deliver them at 
their final destination, his contract is to carry them over his 
own line and deliver or tender them to the connecting car- 
rier. In other words, he is liable as a carrier while the 
goods are in course of transportation over his own line, and 
as a forwarder, while holding them for acceptance by the 
next carrier. 

230. Modification of carrier's liability by contract. — We 
have just seen that a carrier may by contract extend his 
common-law liability. So by contract he may diminish it. 

For example, when goods are tendered to him for trans- 
portation he may say to the owner, " I will carry them for 
a certain price provided you will stipulate to exempt me 
from my liability as insurer." If the owner assents, and 
delivers the goods upon those terms, a valid contract is 
made, and the carrier's liability is reduced from that of 
insurer to that of an ordinary bailee for hire. Thus far 
all courts are agreed, although in some States statutes have 
been passed prohibiting such contracts. But suppose the 
carrier is not content with this modification of his com- 
mon-law liability, and insists that the shipper shall stipu- 
late to exempt him from the liability of an ordinary bailee 
— that is, from liability for negligence on his part or that 
of his servants — and the shipper does so stipulate. Is the 
agreement thus made binding, or is it voidable by the 
shipper ? 



164 ESSENTIALS OF BUSINESS LAW 

In England and in 'New York it is binding. Trne^ the 
shipper is nnder no obligation to enter into snch an agree- 
ment. He has the legal right to say to the carrier, " You 
must carry my goods under your common-law liability," 
and if he takes that position the carrier must receive them 
or pay damages for violating his legal duty. If he does 
receive them, however, upon such terms, he may charge for 
their carriage more than his usual rate, providing his 
charge is not unreasonable. If, however, the shipper does 
not take the position just referred to, but clearly assents to 
the stipulation proposed by the carrier, the English and 
N'ew York courts hold him to his contract. Even these 
courts, however, do not permit the carrier to stipulate 
for exemption from the consequences of his own or his 
servant's wilful misconduct. 

The Supreme Court of the United States and most of 
our State courts refuse to enforce contracts by which the 
common carrier is exempted from liability for negligence. 
They rest this refusal upon two grounds : First, such con- 
tracts are against public policy, as they tend to induce care- 
lessness on the part of the carrier. Second, the modern 
common carrier and the shipper do not stand on a footing 
of equality. A great railroad, or steamship, or express com- 
pany is in a position to compel a shipper to accept its terms 
or not ship at all. When it does take advantage of this posi- 
tion the apparent assent of the shipper is unreal, and the 
contract should be avoided as one obtained by undue influ- 
ence. 

231. Reasonable and fair regulations. — It is agreed by 
all courts that a common carrier may insist upon his pa- 
trons conforming to such fair and reasonable regulations 
as are conducive to the proper conduct of his business. For 
example, he may require claims for loss or damage of prop- 
erty to be presented in writing and within a specified period. 
He may require the shipper to state the nature or the value 



BAILMENTS 165 

of the property offered for carriage. He may stipulate that 
he will not be liable beyond a fixed sum unless extra com- 
pensation is paid. Express companies, for example, limit 
their liability for a package to fifty dollars, unless more than 
the usual rate is paid. This doctrine has been applied by 
the Supreme Court of the United States and by many State 
courts to contracts between railroad companies and shippers 
of freight. 

A man shipped five, horses from Jersey City to St. Louis 
under a written contract which he signed containing a state- 
ment that he admitted the terms and conditions therein set 
out to be just and reasonable. One of those conditions was 
that the carrier assumed a liability on the animals to the 
extent of the agreed valuation of two hundred dollars per 
horse, and no more. Before the horses reached St. Louis 
one was killed and the others so injured as to be worthless, 
in a railway accident caused by the negligence but not by 
the wilful misconduct of the railroad employees. The com- 
pany admitted its liability for the agreed valuation. The 
shipper, however, was not satisfied with this. His horses 
were racers — one of them worth fifteen thousand dollars, he 
claimed. But the court decided that the valuation which 
he put upon them in the contract of shipment was conclusive 
on him. For, said the court, if he had valued them at fif- 
teen thousand dollars each, or at any other large sumy the 
carrier would have charged, and would have been entitled- to, 
a higher rate of freight. Having secured a low rate by 
agreeing to a low valuation, it would be unfair to the carrier 
for the shipper to avoid the contract after loss had occurred. 
Some of our State courts, however, have refused to enforce 
such contracts in cases where the loss is due to the carrier's 
negligence, holding that they are contrary to sound public 
policy. 

232. Statutory modifications of carrier's common-law 
liability. — Both in England and in this country statutes 



166 ESSENTIALS OF BUSINESS LAW 

have been passed relieying the common carrier to some 
extent from his extraordinary liability as insurer. For 
example, a provision of the United States Eevised Statutes 
exempts the owner of a vessel from loss or damage to mer- 
chandise by fire, unless the fire was due to his fault. But 
the statutes differ so widely in details that we can not 
attempt to give a satisfactory account of them here. 

Another class of statutes tend to increase the carrier^s 
liability by compelling him to carry property at lower 
rates than he would otherwise obtain. Still others prohibit 
every sort of discrimination among patrons. In the early 
part of this section we said that the common law required 
the carrier to receive and carry for all persons without dis- 
crimination. Under this rule he was bound to take the 
goods in the order in which they were offered, and not to 
charge any one more than a fair rate. But the rule did not 
prohibit his carrying goods for less than a fair rate, nor 
his receiving them from favored shippers at a later hour 
than was customary. Indeed, the carrier found many ways 
of evading the common-law rule and thus favoring one 
shipper at the expense of another. To correct these abuses 
the legislation last referred to was enacted. Some of it 
went too far and was declared unconstitutional by the 
courts. That which remains in force is intended to secure 
impartial treatment for all shippers similarly situated. 

233. Lien of common carriers. — We have seen that the 
carrier has a right to demand from the shipper payment 
in advance. If he does not insist upon such payment, and 
very often he does not, he has a lien upon the goods — that 
is, he has a right to hold them as security for his services in 
carrying and warehousing them. This lien, like the corre- 
sponding one of the innkeeper, is lost by the voluntary sur- 
render of the property by the carrier. It is only a posses- 
sory lien — that is, a claim upon the goods only while they 



BAILl^IENTS 16Y 

are in the possession of the carrier. At common law the 
lien did not give him the right to sell the goods ; it simply 
secured to him the right to hold them until the freight 
charges were paid. Modern statutes in this country have 
changed this rule^ and have given to the carrier authority 
to sell goods held under his lien at public auction upon 
proper notice, and to apply so much of the proceeds as is 
necessary to the payment of freight and warehouse charges. 

It should be born6 in mind that the carrier does not 
get a lien on property which he receives from a thief, or one 
who is not the true owner, or in some way legally repre- 
sents or acts for the owner. On the other hand, he may be 
forced in such a case to surrender it to the owner, and if he 
has carried it to a distant point to bring it back again with- 
out expense to the owner. 

233 (a). Interstate Commerce Commission. — Eeferenee 
was made to this commission under the head of monopolies. 
It is empowered to pass upon the rates, fares and charges 
f-xed by common carriers for interstate transportation. If 
it finds them unreasonable, or unjustly discriminatory, it 
may change them and compel the carrier to accept its 
schedule of rates. From such orders the carrier may appeal 
to the courts and have them enjoined, set aside, annulled 
or suspended if he shows himself entitled to such relief. 
On the other hand, if the carrier has collected unfair rates, 
or has unjustly discriminated against a shipper, the person 
injured may recover the full amount of damages which he 
has suffered therefrom (Ch. 104, L. 1887, §§2 and 3). 

While this act applies in terms to interstate commerce 
only, the Supreme Court has held that it gives the commis- 
sion power, in some cases, to control intra-state rates. Cer- 
tain railroads in Texas fixed freight rates so that they gave 
to cities in Texas an unlawful and undue preference and 
advantage over a city in Louisiana. The Interstate Com- 



168 ESSENTIALS OF BUSINESS LAW 

mission ordered them to desist from this discrimination. 
They brought suit to set side the order, on the ground that 
the commission had no authority over intra-state rates; 
that is, over rates between places within the state of Texas. 
But the court held that the commission had power to con- 
trol intrastate charges of an interstate carrier to the extent 
necessary to prevent injurious discrimination against inter- 
state commerce. 

233 (b). Liability of first carrier. — The act above re- 
ferred to has been modified by the Carmack amendment of 
1906 and the Cummins amendment of 1915 (§ 20 of orig- 
inal act, in 4 Fed. St., Annotated 2d Ed., p. 506). It now 
requires a carrier receiving property for interstate trans- 
portation to issue a through bill of lading, although .the 
destination is on the line of another carrier; subjects the 
receiving carrier to liability for any injury to the property 
caused by it or any other carrier in the course of transit 
and requires a connecting carrier to reimburse the receiv- 
ing carrier when the latter is made to pay for the injury. 
That is, the connecting carrier is made the agent of the 
receiving carrier for the completion of the transit, and such 
carrier is not allowed by contract to exempt itself from the 
liability imposed by the statute. 

233 (c). Bills of lading. — These were introduced by 
mercantile usage and their legal characteristics were fixed 
by the law merchant before they became the subjects of 
litigation in common law courts. Hence they differed from 
other documents of title, such as dock warrants or ware- 
house receipts. Their lawful transfer was the legal equiv- 
alent of the transfer of the goods themselves, while the 
transfer of other documents of title "operated only as a 
token of authority to take possession and not as a transfer 
of possession.'' As a symbol of the goods, a bill of lading 
was treated by the law merchant as negotiable to some ex- 



BAILMENTS 169 

tent. Its legal holder might indorse it to a hona fide pur- 
chaser, who would hold the goods free from the "unpaid 
vendor's right of stoppage in transitu (to be considered in 
the chapter on sales), and free also from the claims of a 
defrauded vendor. 

A bill of lading, in Great Britain and in Continental 
nations, is "the written evidence of a contract for the car- 
riage and delivery of goods sent by sea for a certain freight/' 
In this country, it includes contracts for carriage by land. 
Here, a railway company's bill of lading is a symbol of the 
goods and transferable by indorsement. In the other coun- 
tries, land carriers give receipts which have none of the 
incidents of a sea carrier's bill of lading. 

233 (d). Statutory provisions. — The extensive use of 
bills of lading in this country has led to a codification of 
the law relating to them. A Uniform Bill of Lading Act 
was prepared by the Conference of Commissioners on Uni- 
form State laws, which has been adopted (1918) by nine- 
teen states. (See Mass. L. 1910, Ch. 214 and N. Y. L. 1911, 
Ch. 248.) With some changes it was adopted by congress 
for carriers engaged in interstate and foreign commerce. 
(Act of Aug. 29, 1916, Ch. 415.) 

By this legislation, bills of lading are classified as ^^non- 
negotiable or straight bills," and '^^negotiable or order bills." 
The former make the goods deliverable to a specified per- 
son. Of this sort are the documents ordinarily issued by 
express companies for parcels or for baggage. If the bill 
states that the goods are consigned to the order of any per- 
son, it is negotiable; and this character cannot be taken 
from it by the carrier's stamping it as non-negotiable. These 
statutes declare bills of this form fully negotiable; and, if 
they have been indorsed in blank, a thief may give a perfect 
title to a purchaser in good faith and for value. The war- 
ranties by the indorser of these bills are the same as those 



170 ESSENTIALS OF BUSINESS LAW 

of indorsers of negotiable warehouse receipts. Carriers, who 
have issued negotiable bills of lading, either personally or 
by an agent who has actual or apparent authority to issue 
them, cannot dispute the receipt of the goods as against a 
holder in good faith and for value. Persons responsible 
for the fraudulent issue of fictitious bills of lading are 
punishable criminally. 



§ 11. Common Carriers of Passengers 

234. Duty to receive passengers. — While a common car- 
rier is not a bailee of the passenger's person, he is bailee 
of the passenger's baggage, for he receives this under an 
agreement to transport it for him and deliver it up at 
the stipulated place and time. It is proper, therefore, to 
deal with this class of carriers in connection with bail- 
ments. Moreover, as they hold themselves out to the public, 
as ready and willing to carry all persons indifferently, they 
are subject to a common-law duty similar to that imposed 
upon common carriers of goods; they must receive and 
carry, to the extent of their accommodations, and in the 
order in which they come, all fit persons applying for pas- 
sage, who are ready and willing to pay their fare and con- 
form to reasonable regulations. For a breach of this duty 
they are liable to an action for damages by the person thus 
wronged. 

It will be noticed that a carrier is not bound to receive 
unfit persons, such as notorious criminals, or those afilicted 
with contagious diseases, or offensively sick, or drunken, or 
disorderly. Indeed, even after such are in his waiting- 
rooms or vehicles, he may turn them away, provided he 
acts in a reasonably humane and considerate manner. 

Nor is the carrier bound to receive those who apply not 



BAILMENTS 171 

for passage, not as travelers, but for the purpose of doing 
business in the carrier's coach, or cars, or ship. His under- 
taking is to transport passengers, not to turn his vehicle 
into a market or store on wheels. 

Some of the regulations which have been declared rea- 
sonable by the courts'are the following : That the passenger 
shall buy a ticket before boarding a train or vessel; that 
tickets must be used, within a specified time ; that they must 
be produced when called for by the carrier's agent, such as 
a railroad conductor; that coupon tickets shall not be good 
if the coupons are detached; that a ticket shall not entitle 
the passenger to break his journey and stop over at an inter- 
mediate station. 

235. Care of passengers. — The carrier does not insure 
the safety of passengers, as he does that of goods, but he is 
bound to use the best precautions which are known to be 
in practical use to secure their safety. His duty in this 
respect begins as soon as a person is accepted as a pas- 
senger, and such relationship may exist before the person 
has boarded a vehicle. For example, a person hails a street- 
car. It stops for him. He takes hold of the hand-rail, but 
before he can enter the car it is started and he is thrown 
to the ground. His right is that of a passenger. Such, too, 
is the right of a railroad ticket-holder on a station platform 
or in a waiting-room. Indeed, the much-laughed-at Irish 
bull of the excited traveler, from whom his train had run 
away, " Sure, you have a passenger aboard whom you have 
left behind," is not far from being good law. 

Not only is the carrier bound to exercise a high degree 
of care in selecting his means of conveyance, but he must 
be equally careful in inspecting and repairing them. Of 
course, the skill and diligence necessary to the proper per- 
formance of this duty will depend very largely upon the 
circumstances of each case. One who runs a stage-coach 
up and down mountains or along deep ravines must have 



172 ESSENTIALS OP BUSINESS LAW 

better coaches, harness, and horses, and more experienced 
drivers than he whose route is over a sandy plain. So, too, 
the care and skill required of those in charge of an ocean 
steamship are very different from those which will satisfy 
the obligation of a canal boatman. The watchfulness of 
the carrier must increase with the known risks of his 
business. If he propels his cars by electricity he must see 
that this dangerous force does not escape, and if through 
his negligence ft does escape and charge the iron guard-rail 
of a car, and thereby a passenger is hurt, the carrier is 
liable. 

236. Accommodations for passeng^ers. — While a carrier 
is not bound to receive persons beyond the capacity of his 
vehicles, yet, if he sells tickets to more than can be seated, 
those who are left standing may refuse to give up their 
tickets ; and, if required to leave the car or other conveyance, 
may sue the carrier for breach of his contract. Although 
his ticket entitles him to ride only in a common car, the 
passenger may take a seat in a parlor or sleeping car of 
the train until a seat in a common car is supplied. This 
rule does not apply to ferry-boats, where the usage of many 
passengers is to stand instead of taking seats. In such 
cases the carrier is bound to provide only sufficient seats 
for those who ordinarily prefer to be seated. Indeed, the 
rule, even in case of railroad passengers who are to ride a 
long distance, is " more honored in the breach than the 
observance," owing to the good nature of the American pub- 
lic, and the disposition of the average person " to get there " 
rather than to wait for a less crowded train and sue for 
damages. 

237. Treatment of passeng^ers. — The carrier is bound 
to treat his passengers in a decent and proper manner, so 
long as they conduct themselves properly. For the acts of 
his agents and servants toward passengers he is often liable 
where the ordinary principal would not be. In the chapter 



BAILMENTS 173 

on Agency we saw that the liability of the principal is gen- 
erally limited to acts of his agents or servants done within 
the scope of their apparent authority. But a railroad com- 
pany has been held liable in damages, as for an assault and 
battery, to a lady who was kissed, without her permission, 
by a conductor. Of course, such act was not within the 
scope of his apparent authority. Still, the court held, and 
such is the prevailing rule in this country, that a common 
carrier undertakes absolutely to protect his passengers 
against the misconduct of his servants while engaged in 
executing the contract of carriage. 

The carrier is bound, also, to make every reasonable 
effort to protect his passengers from violence or insult by 
strangers or fellow-passengers. If he has notice that a mob 
will probably attack certain passengers if the train is 
stopped at a particular place, he must take reasonable pre- 
cautions against the attack. If one passenger abuses or 
threatens another the carrier should take proper measures 
to quiet the assailant or put him off the car. But for the 
negligence of a fellow passenger the carrier is not ordi- 
narily responsible. In a case decided by the New York 
Court of Appeals it appeared that the plaintiff was injured 
by the fall of a clothes-wringer which a fellow passenger 
had carelessly put in a rack over plaintiff's seat. The court 
held that the carrier was not bound " to exercise the highest 
care which human vigilance can give," against the negli- 
gence of fellow passengers, but only reasonable care, and as 
there was no evidence of the lack of such care on the part 
of the trainmen the plaintiff could not recover against the 
road. 

238. Limitation of carrier's liability by contract. — In 
England and in some of our States the carrier of passengers 
is allowed to limit his common-law liability by an express 
contract, even to the extent of exempting himself from dam- 
ages caused by his negligence or that of his servants. The 



174 ESSENTIALS OF BUSINESS LAW 

Federal courts as well as those of most of our States refuse 
to enforce such contracts, for the reasons which we re- 
counted in the preceding section, when dealing with similar 
contracts by carriers of goods. 

239. Carrier's liability for passenger's baggage. — When 
a passenger buys his ticket he acquires the right to have his 
personal baggage carried as well as himself. For such bag- 
gage the carrier is liable at common law as an insurer 
against all loss or damage save that caused by the act of God, 
or the public enemy, or the fault of the passenger. He may 
indeed, by a contract fairly made with the passenger, limit 
his liability to a specific sum, unless the character of the bag- 
gage is disclosed and he receives extra pay. 

A good deal of litigation has been needed to define the 
term baggage, and the end is not yet. However, it is gen- 
erally held to include not only such articles as are absolutely 
necessary for the passenger, while traveling, but those which 
minister to his comfort, convenience, and recreation while 
away from home, or which he is taking to his home. The 
gun and ammunition, the fishing-tackle and appliances, of 
those on hunting or fishing excursions; the golf-sticks of 
one on his way to the links; the beds and bedding of one 
moving with his family ; new clothing for members of one's 
family, but not presents for his landlady, have been declared 
by the courts to come within the term baggage. On the 
other hand the sample trunks of the drummer; ninety-two 
thousand dollars in gold coin which a county treasurer was 
carrying to the treasurer of a State ; stage costumes, appli- 
ances, and advertisements of a theatrical company, have 
been held not to be personal baggage. 

Perhaps one of the largest sums ever recovered for bag- 
gage was ten thousand dollars awarded by a jury to the Eus- 
sian Countess Fraloff against the New York Central Eail- 
road. After traveling in Europe, Asia, and Africa, she came 
to America. On the trip from New York to Niagara Falls 



BAILMENTS 175 

one of her trunks was broken open and some two hundred 
yards of dress lace stolen. This she valued at fifty thousand 
dollars, but the railroad declined to pay her anything, on 
the ground that the lace was not a proper item of baggage. 
In sustaining a recovery by the countess for ten thousand 
dollars, the Supreme Court of the United States laid down 
this rule : " Whether articles of wearing apparel, in any par- 
ticular case, constitute baggage, for which the carrier is 
liable as insurer, depends upon the inquiry whether they are 
such in quantity and value as passengers under like circum- 
stances ordinarily or usually carry for personal use when 
traveling." Taking the great wealth and high social position 
of the plaintiff into account, the court did not think the 
jury was wrong in holding that this dress lace was a suitable 
and ordinary item of her baggage. 

240. Fault of the passenger. — Oftentimes the passenger 
keeps a part of his baggage under his exclusive control. In 
such cases the carrier is not liable as insurer, but only for 
loss or injury due to the negligence or misconduct of him- 
self or his servants. A person who drives his horses on to 
a ferry-boat and remains in control of them must bear the 
loss if they are frightened and jump from the boat into the 
water. So must the passenger whose hand-bag is stolen 
or lost without negligence on the part of the carrier. 

241. Termination of carrier's liability. — Not only is the 
carrier bound to transport the passenger and his baggage 
to the destination agreed upon, but he is bound to afford a 
suitable opportunity for alighting. If he owns or controls 
the premises where the passenger alights, he is bound to keep 
them in a safe condition. Moreover, he must give a reason- 
able time and a fair opportunity for the removal of bag- 
gage. Usually a passenger has twenty-four hours within 
which to take his baggage. During such period the carrier 
remains liable as insurer, but thereafter he is liable as ware- 
houseman only, and may charge a warehouseman's fees. 



176 ESSENTIALS OF BUSINESS LAW 

§ 12. Telegraph and Telephone Companies 

242. Not common carriers. — The telegraph and the tele- 
phone have not only revolutionized business habits and be- 
come necessities of commerce, but have brought before the 
courts for decision many novel questions. One of the earli- 
est of these related to the legal status of a telegraph com- 
pany. " Was it a common carrier ? " Some courts answered 
it in the affirmative, and this view still prevails in a few 
jurisdictions; but the great weight of authority favors a 
negative answer. Upon principle it seems clear that neither 
the telegraph nor telephone company is a carrier, or bailee 
of any kind, of the message transmitted over its wires. It 
does not receive a chattel or article of personal property 
which is to be carried and delivered to the bailor or some 
one named by him. The telegraph company receives a bit 
of writing and translates and transmits its language 
through different symbols, by means of electricity, to its 
agent at a distance. The telephone company furnishes lines 
and instruments, by the use of which a person can transmit 
his spoken words to one at a distance. Surely here is no 
transportation of goods. Moreover, the company has no 
such peculiar opportunity as that of the common carrier to 
embezzle property or to collude with thieves. Accordingly, it 
should not be held to the rigid accountability of the common 
carrier ; it should not be treated as an insurer of the safety 
of the message. For example, if the message is destroyed 
by fire, without the company's negligence, either at the of- 
fice where it is received, at an office where it is to be repeat- 
ed, or at the office of final destination, the company should 
not be held liable to the sender, although he may have suf- 
fered a great loss thereby. And such is the prevailing view. 

243. Nature of the company's liability. — While a tele- 
graph or telephone company is not an insurer of safety or 
accuracy in the transmission of messages, it is bound to use 



BAILMENTS 177 

reasonable care in the construction and maintenance of its 
lines and instruments and in the selection of its agents and 
servants. For damages to its patrons caused by its negli- 
gence in any such respect it is answerable. 

It is also bound to serve all customers alike, without 
discrimination; and it must receive to the extent of its 
Rapacity, all decent and lawful messages which are legibly 
written and for which reasonable compensation is tendered. 
It is entitled to reject immoral or libelous messages. In- 
deed, if it transmits a libel — that is, a writing which tends 
to bring a person into hatred, contempt, or ridicule — it 
makes itself liable to an action for publishing the defama- 
tory statement. In one case a telegraph company had to 
pay a thousand dollars' damages for transmitting this mes- 
sage to a candidate for a political office, " Slippery Sam, 
your name is pants." 

244. Liability may be limited or enlarged by contract. — 
At times telegraph companies agree to insure the accuracy 
or the specially prompt delivery of messages for extra com- 
pensation. Such contracts are always binding. On the 
other hand, these companies more frequently stipulate for 
entire exemption from liability, unless the message is re- 
peated — that is, telegraphed back to the originating office 
for comparison, and an additional charge — usually one-half 
the regular rate — is paid. Whether such a stipulation is 
binding on the sender of the message is a question upon 
which the courts have differed. The United States Supreme 
Court and the majority of the State courts hold that it is, 
while the courts of a few States hold it to be void. The 
latter holding is based on two principal grounds : First, that 
the company and the sender are not on an equal footing, the 
former being in a position to force the latter to accept what- 
ever terms it may impose ; and, second, that the stipulation is 
against public policy, because it tends to make the company 
and its servants careless in the performance of their dutieSr 



178 ESSENTIALS OF BUSINESS LAW 

Another stipulation, which telegraph companies usually 
require the sender to agree to, is that it shall not be liable 
for damages unless the claim is presented in writing within 
sixty days after the message is filed with the company for 
transmission. This has been adjudged a reasonable regula- 
tion by most courts. It has for its object, these courts de- 
clare, not the exemption of the company from the conse- 
quences of its negligence, but a fairly prompt notification 
of claims made against it, so that it may inquire into the 
circumstances of a mistake, while the matter is fresh in the 
memory of its agents and servants. It simply requires 
the sender to act fairly, and tends to protect the company 
against stale and trumped-up claims. Some courts, how- 
ever, hold such a stipulation void, because they think it 
shortens unduly the time for presenting claims. 

245. To whom the company is liable. — Upon this point, 
also, the courts are not agreed. Some hold that the liability 
is limited to the sender of the message, unless the one to 
whom it is sent is the sender's principal. Other courts hold 
the company liable to the receiver as well as to the sender. 
A leading case in Pennsylvania afl:ords a fine example of 
this view. L delivered to a telegraph company in ~New York 
city a message to D, a florist in Philadelphia, ordering two 
hand bouquets. The 'New York operator thought " hand " 
was " hund,'' and sent the message for " two hundred bou- 
quets." D prepared that number, but L refused to take 
them, on the ground that he had ordered only two. D sued 
the company and recovered a hundred dollars' damages. 
The court said : " If the handwriting was so bad that the 
operator could not read it correctly he should not have under- 
taken to send it ; but the business of transmission assumed, 
it was his duty to send what was written. When he presumed 
to translate the handwriting, and to add letters which con- 
fessedly were not in it, he made the company responsible for 
the damages that resulted from his wrongdoing." 



BAILMENTS lf9 

§ 13. Public Utilities 

245 (a). Test of a public utility. — Whether a carrier 
of goods or of persons, a telephone or telegraph owner, a 
dealer in gas or electricity, a warehouseman, an owner of 
a water supply, or the like, is subject to legislative control 
depends upon whether he has undertaken to serve the public 
or limits his service to patrons of his choice. A company 
or individual engaged in supplying water, gas or electricity 
to the public is a public utility and his rates may be regu- 
lated by the state. He may be prohibited, too, from unfair 
discrimination among his patrons as well as from arbitrary 
refusal to serve any of them. If, however, he undertakes 
to furnish water only under private contracts with certain 
persons of his own selection he is not subject to such con- 
trol. The same has been held of the owner of a natural gas 
plant, which uses it for its own purposes and sells any sur- 
plus above its needs to such of its neighbors as it cares to 
deal wdth. So, too, if the owner of an electric plant sells a 
part of his surplus electricity to neighbors, but does not 
engage in the business as a public one, his occupation is 
private, and a neighbor has no legal complaint if the owner 
refuses to supply him with electric light or power. Wliether 
mutual telephone companies are public utilities has been 
differently decided. The Illinois supreme court holds that 
they are, though organized to render service to their mem- 
bers at cost, especially where they are to connect their mem- 
bers with other lines. On the other hand, Oklahoma courts 
hold them not subject to regulation as public enterprises. 
The same view has been taken in Wisconsin of similar lines 
of business. 

A taxicab company is engaged in a public service business 
as a carrier of passeilgers, but not in the conduct of its 
garage, according to the U. S. supreme court. 

245 (b). Public utility commissions. — We have seen 



180 ESSENTIALS OF BUSINESS LAW 

that congress has given to the Interstate Commerce Com- 
mission authority to control public service or utility com- 
panies, who do an interstate business; and every state has 
a commission empowered to regulate, with more or less 
detail, the operations of public service companies. Some 
states limit their legislation to railroad corporations, though 
most of them provide supervision for every kind of public 
service enterprise, whether carried on by corporations or by 
natural persons. The difference in the statutes accounts in 
part for the different holdings of the courts, referred to in 
the preceding paragraph. 

They account, too, for opposite rulings in New York 
and New Jersey, as to the power of a state commission to 
increase rates of a public utility company. In the former 
state it was held that the public service commission had no 
jurisdiction of an application by a railroad company to raise 
street-car fares in Eochester from five to six cents, when the 
lower rate had been fixed by agreement between the com- 
pany and the city. In New Jersey, it was held that the 
state commission had authority to increase the rates of a 
sewerage company in Collingwood, although they had been 
fixed by agreement between the company and the municipal- 
ity. A like decision was made in Missouri, where the com- 
mission raised the rates of a water supply company above 
those fixed by a contract between the city of Sedalia and 
the company. In each case, the decision turned upon the 
terms of the statute creating the commission. 

245 (c). Limit of regulation. — While the principal 
basis of statutory regulation of public utility owners is the 
police power of the state — that is the power to legislate for 
the promotion of the health, safety and general welfare of 
the public — such regulation is not without limit. Courts 
are generally disposed to uphold these laws and the decisions 
of commissions in enforcing them. If, however, the rates 
fixed by the commission are so low as to force the utility 



BAILMENTS 181 

owner to do business at a loss, or if any other regulation 
imposed by the commission is really confiscatory of the cap- 
ital embarked in the enterprise, the order of the commission 
will be set aside. Indeed a statute, which operates to con- 
fiscate the property of a public utility, as distinguished from 
so regulating its busii^iess that it shall treat the public fairly 
and honestly, will be declared unconstitutional ; for it would 
operate to deprive the owner of property without compensa- 
tion and without due process of law. 

245 (d). Control of business during war. — Even the 
management of private business was subjected to a large 
measure of governmental supervision and control by federal 
and state statutes, during the late war with Germany and 
her allies. The Federal Food Bill is an example (L. 1917, 
Ch. 52). It applied to foods, feeds, fuel of various kinds, 
fertilizers and things used in their manufacture; provided 
for licensing those engaged in dealing in them, for sup- 
pressing unfair practices, for prohibiting their waste and 
for -fixing prices. Many states passed supplementary legis- 
lation, e.g., the New York Food Commission Act (L. 1917, 
Ch. 813). This declared that "during the existence of a 
state of war, the production, manufacture, marketing, stor- 
age,, accumulation, distribution, supply, waste, hoarding, 
destruction, cost to producers and distributors, price to con- 
sumers, and the expense of handling necessaries, are mat- 
ters of public interest and proper subjects for investigation, 
encouragement, development, regulation and control by the 
state to the end that while such state of war exists, the peo- 
ple of the state may, in common with the people of other 
states, have an adequate supply of pure and wholesome food, 
their health be protected, their energies conserved, and that 
they may not suffer from the excessive cost, unreasonable 
prices or speculation in the necessaries of life." 

While this legislation was limited, in express terms, to 
the period of the war, and justified by the extraordinary 



182 ESSENTIALS OF BUSIXESS LAW 

exigencies of Avar conditions, ^^it will be strange if it does 
not have a marked effect upon legislation in the days of 
reconstruction, especially if it proves successful in curbing 
those economic abuses at Avhicli it was aimed, and which are 
only a degree less dangerous in time of peace than in time 
of war. The continuance of such legislation, as far as state 
laws go, would not be difficult to justify in peace times 
under the police power."' ^ 

Indeed, Idaho has declared that the business of market- 
ing farm products in that state is ^"affected with a public 
interest and is subject to regulation and control by the 
state." (L. 191T', Ch. 2-i.) Accordingly, it provides for 
the ^'establishment and promulgation of standards for open 
and closed receptacles for farm products and standards" for 
their grade and classification, and makes a violation of the 
statute a criminal offense. By another act (L, 1917, Ch. 
23), Idaho prohibits price discrimination in the purchase or 
re-sale of agricultural products, and subjects ''the books, 
papers and other records of any person, firm, corporation 
or other organization engaged in the business of buying and 
selling farm products to the inspection of the Director of 
Farm Products of the State." 

If, as declared by the Xew York legislature, state regu- 
lation of the manufacture, distribution and prices of the 
necessaries of life is of public interest in time of war, "to 
the end . . . that the people . . . may have an adequate 
supply of pure and wholesome food, their health be pro- 
tected and their energies conserved," it is difficult to see 
that such regulation may not enure to the public interest 
in time of peace. If, as a matter of fact, the regulation of 
any private business does promote directly and strongly 
the public welfare, we may expect to see more and more 
legislation, directed to the regulation and control of what 

^ PuLllc Service and tlie War. Charles K. Burdick, 3 Soutliern 
Law Quarterly, 203. 



BAILMENTS 183 

is now classed as private business, and a corresponding en- 
largement of the category of public utilities. The writer, 
above quoted, suggests that "such enlargement may in time 
bring us again much ne'arer than we are at present to the 
rule of the early common law, that every business is a com- 
mon calling, owing tQ the public the duty of reasonable 
service," and, therefore, subject to the control of public 
utility commissions. 



CHAPTER yi 

BANKRUPTCY AND INSOLVENCY 

246. The severity of early bankruptcy laws. — No branch 
of law furnishes a better illustration of the way in which 
legal rules are modified by the moral sense and the busi- 
ness interests of communities than the one we are now 
to consider. Primitive law treats the man who can not 
pay his debts with great harshness. According to some au- 
thorities a creditor was permitted by the law of early Rome 
to put his debtor to death if the debt remained unpaid for 
a certain length of time, and in case there were several 
creditors they might cut the debtor's body in pieces and each 
take a share. This " butcherly '' practise, as Blackstone 
calls it, has been doubted, but there seems to be no question 
that a man who could not pay his debts with property had 
to pay it with his person in early Rome — that is, he became 
the creditor's slave. 

While the early common law of England did not turn 
the debtor over to the creditor as a slave, it did permit his 
imprisonment, on the theory that he was guilty of a breach 
of the peace when he failed to pay a judgment which had 
been given against him. For such a man the common-law 
judges had no sympathy. As late as 1663 one of them ex- 
pressed his views of the spirit of the common law toward 
insolvent debtors in these words : " If a man is taken in 
execution and lies in prison for debt, neither the plaintiff, 
at whose suit he is arrested, nor the sheriff, who takes him, 
184 



BANKRUPTCY AND INSOLVENCY 185 

is bound to find him meat, drink, or clothes. He must live 
on his own or on the charity of others, and if no one will 
relieve him, let him die" in the name of God, says the law, 
and so say I." 

247. The rigor of early law has been softened. — Were a 
judge to express such a sentiment to-day, he would be driven 
from the bench. Public opinion would not tolerate such 
brutality and heartlessness in a judicial officer. During the 
two centuries and a half which have passed since Justice 
Hyde gave utterance to the cruel doctrine of his day in the 
language quoted in the last paragraph, the people of Eng- 
land and of this country have come to believe that imprison- 
ment for debt, when there is no fraud or dishonesty on the 
part of the debtor, is both inhuman and impolitic. It sub- 
jects unfortunate men and women to shameful and painful 
indignities; it throws decent people into association with 
vile criminals, and it prevents them from earning money 
for the support of their families and themselves. Accord- 
ingly, statutes have been passed forbidding the arrest and 
imprisonment of honest debtors. 

248. Bistinction between insolvency and "bankruptcy 
laws. — Such stC;tutes as we have just referred to are known 
as insolvency laws. Their object is to deliver the debtor's 
person from imprisonment, but not to free him from lia- 
bility for past debts. On the other hand, bankruptcy stat- 
utes are not concerned directly about the debtors' liability 
to imprisonment, but seek to accomplish other objects, viz., 
the division of the debtor's property ratably among all 
his creditors, and his discharge from all indebtedness. 

The early bankruptcy statutes in England applied only 
to persons who were engaged in trade. It was thought that 
when such men were overwhelmed by business misfortunes, 
without dishonesty on their part, they ought to be allowed to 
turn over what property they had to their creditors and ob- 
tain a full discharge from their debts. Then they could 



186 ESSENTIALS OF BUSI^^ESS LAW 

start in business again, and possibly be successful. But this 
chance was denied to all who were not engaged in trade. At 
present, both in England and in this country, any debtor, 
whether a trader or not, can take advantage of the bank- 
ruptcy laws. Accordingly, the distinction between insolv- 
ency and bankruptcy has ceased to be of much importance. 
In some of our States the statutes which provide for debtors' 
discharge from debts are called insolvency statutes, while 
a similar statute of the United States is called a bankruptcy 
statute. Perhaps it should be noted in this connection that 
the term insolvency is not always used in the sense of bank- 
ruptcy — that is, to signify that a person has been adjudged a 
bankrupt, and his property has been taken for division 
among his creditors; but that it often means the financial 
condition of one who can not pay his debts as they fall due. 
In this chapter, however, we shall use it as synonymous with 
bankruptcy. 

249. Bankruptcy legislation in the United States. — Be- 
fore the adoption of the Federal Constitution the several 
States had absolute control of the subject of bankruptcy, 
but by a clause of the eighth section of Article I of the 
Constitution, power was given to Congress to " establish 
uniform laws on the subject of bankruptcies throughout the 
United States.'' This grant of power, however, did not 
oust the States of their original authority over the subject. 
They are still at liberty to pass bankruptcy statutes; but 
such laws become inoperative whenever a law of Congress 
on the same subject is in force. 

Congress has exercised this power very sparingly. Its 
first bankruptcy statute was that of 1800. That was passed 
as a temporary measure, and was repealed in 1803. It was. 
copied after the English bankruptcy statute of that time, 
and was limited to traders. One of the principal objections 
to it was that it allowed the merchant,- the manufacturer, 
and other traders to get a discharge from all their debts 



BANKRUPTCY AND INSOLVENCY 187 

while farmers and those not in trade could not take advan- 
tage of the statute and.obtain a discharge from theirs. The 
next bankruptcy statute passed by Congress was that of 
1841. It too proved unsatisfactory and was repealed in 
1843. A third statute was passed in 1867 and repealed in 
1878. The present law went into effect July 1, 1898. 

250. State bankruptcy laws are now suspended. — The 
Federal act of 1898 provided that " proceedings commenced 
under State insolvency laws before the passage of this act 
shall not be affected by it." All other proceedings under 
such laws are invalid. In other words^ the State laws on the 
subject of insolvency or bankruptcy are now suspended. 
They are not repealed, it should be remembered, but they 
have no vitality so long as a Federal statute on the subject 
is in force. This is due to the fact that the Constitution 
of the United States and statutes passed in accordance with 
it are the supreme law of the land. Should this Federal 
statute be repealed, however, the State laws would at once 
come into operation, without any new legislation by the 
States. 

251. The theory of bankruptcy legislation. — The earli- 
est bankruptcy statutes in England (those passed during 
the reigns of Henry VIII and Elizabeth) proceeded upon 
the theory that traders who failed in business were dishon- 
est as a rule, and should be punished. Lord Coke thought 
that these statutes were rendered necessary by the growth 
of iniquity among English merchants. He said : " We have 
fetched the name as well as the wickedness of bankruptcy 
from foreign nations. We do not find any act of Parliament 
made against any English bankrupt until the English mer- 
chant had rioted in three kinds of costliness, namely, costly 
buildings, costly diet, and costly apparel, accompanied with 
neglect of his trade and servants, and thereby consumed his 
wealth." But that view, and the harsh statutes which it 
produced, have long since been discarded. 



188 ESSE^TTIALS OF BUSINESS LAW 

Modern bankruptcy legislation is based upon the theory 
that financial ruin comes upon multitudes of honest and 
capable business men ; that when a man is thus overwhelmed 
his estate ought to be divided ratably among all his cred- 
itors; and that it is for the benefit of the public, quite as 
much as it is for his own good, that he should have a dis- 
charge from his debts and thus be able to make a fresh 
start in business. Bankruptcy has been called commercial 
death, and a discharge a new commercial birth.^ 

The importance of a national bankruptcy law is shown 
by the statistics of business failures in the United States. 
Even in the prosperous year 1901 there were about ten 
thousand failures, with liabilities of a hundred million dol- 
lars, while in the panicky year, 1893, the numbers were 15,- 
242, with liabilities aggregating $346,779,889. 

252. Who may be declared bankrupt. — Under the pres- 
ent Federal law any person who owes debts, except a cor- 
poration, may be adjudged a bankrupt if he wishes to take 
advantage of the act. .Such a proceeding is one of voluntary 
bankruptcy. Not every person, however, can be forced into 
bankruptcy by his creditors. A " wage-earner ^' can not be, 
nor " a person engaged chiefly in farming or the tillage of 
the soil." Even in the case of a person not belonging to 
one of these excepted classes, he must owe debts to the 
amount of one thousand dollars or over; he must have com- 
mitted an act of bankruptcy, and the aggregate of his prop- 
erty at a fair valuation must be insufficient to pay his debts, 
or he can not be declared a bankrupt in an involuntary pro- 
ceeding. 

253. What are acts of bankruptcy? — These are divided 
into five classes by the statute, and consist of (1) his hav- 

^ The speech of Congressman Jenekes, of Rhode Island, in explana- 
tion of the bill which became the bankruptcy law of 1867, is very- 
interesting and valuable. It is found in the Congressional Globe for 
1863-'G4, p. 2636. 



BANKEUPTCY AND INSOLVENCY 180 

ing transferred or concealed any of his property with in- 
tent to hinder, delay-, or defraud his creditors; or (2) 
transferring any of his property to a creditor for the pur- 
pose of giving that one a preference over other creditors; 
or (3) suffering a creditor to obtain a preference through 
legal proceedings; or (4) making an assignment of all his 
property to a trustee for creditors; or (5) admitting in 
writing his inability to pay his debts and his willingness to 
be adjudged a bankrupt. The doing of any of the acts thus 
enumerated subjects the doer to a proceeding by his cred- 
itors to force him into bankruptcy. 

254. Courts; referees; trustees. — Bankruptcy proceed- 
ings, whether voluntarily instituted by the debtor, or 
whether they are begun against his will by creditors, are 
brought in the United States district court, but many of 
the judicial duties connected with such proceedings are per- 
formed not by the district judge, but by referees, who are 
appointed by him. The statute provides that there shall be 
at least one referee in each county where his services are 
required, so that neither the bankrupt nor the creditors 
need make long journeys in order to get to court. 

As soon as one is adjudged a bankrupt it becomes his 
duty to make out a list of his creditors and a statement of 
his property. The creditors may then elect a trustee, and 
if they fail to elect, the court may appoint one, whose duty 
it is to take all of the bankrupt's property except such as is 
exempt from execution, convert it into cash, and divide this 
ratably among those of his creditors who have made and 
filed proofs of their claims in the manner provided by the 
statute. The amount and kind of property which a bank- 
rupt may retain as exempt from execution will depend on 
the laws of the State where he is living when the bankruptcy 
proceedings are begun. These laws differ very widely in 
their provisions. Some States secure to the debtor only a 
small amount of the most necessary property, while others 



190 ESSEITTIALS OF BUSINESS LAW 

exempt for the benefit of himself and family property worth 
several thousand dollars. 

255. Discharge of a bankrupt. — A debtor who has been 
honest in his business relations, who has not defrauded any 
of his creditors or wilfully injured property, and who has 
also acted in accordance with the requirements of the 
statute, after his adjudication as a bankrupt, may obtain a 
discharge from all his debts except taxes. Following is the 
form of an order discharging a bankrupt: 

District Coukt of the United States, 

Northern District of New York. 
Whereas, John Smith of Utica, in said district, has been duly 
adjudged a bankrupt, under the acts of Congress relating to bank- 
ruptcy, and appears to have conformed to all the requirements of law 
in their behalf, it is therefore ordered by this court that said John 
Smith be discharged from all debts and claims which are provable 
by said acts against his estate, and which existed on the first day of 
February, a. d. 1901, on which day the petition for adjudication was 
filed against him- ; excepting such debts as are by law exempted 
from the operation of a discharge in bankruptcy. 

Witness the Honorable Alfred C. Coxe, Judge of said District 
Court, and the seal thereof, this first day of August, a. d. 1901. 

Ch^SlRles B. Germain, Clerk. 

If the bankrupt is sued thereafter on any debt from 
which this order discharges him he may plead his dis- 
charge as a defense, and thus defeat the action. 

The discharge does not exempt him from liabilities for 
certain torts, nor for alimony, maintenance or support of 
wife or child, nor from debts created by his fraud, embezzle- 
ment, misappropriation, or defalcation while acting as an 
officer or in a fiduciary capacity; nor from debts not sched- 
uled in time for proof and allowance, unless the creditor 
had notice or actual knowledge of the bankruptcy proceed- 
ings. 



CHAPTEE YII 

INSURANCE 

256. Its nature and origin. — The system of insurance 
has for its object the accumulation of a fund out of which 
persons who suffer from some accident or mishap may have 
their losses made good. This fund is accumulated from 
premiums paid by those who are exposed to some risk, 
such as the owners of vessels or cargoes which may be ship- 
wrecked, or the owners of buildings or goods which may 
be destroyed by fire. The amount of the premium in fire 
and marine insurance, varies with the degree of hazard to 
which the property is supposed to be subjected. Thus, the 
fire-insurance premium is smaller in places where there are 
excellent facilities for putting out fires than in places where 
such facilities are poor. The owner of a stone or brick 
building pays less insurance than he whose buildings are 
of wood, and .still less is paid by the owner of a fire-proof 
structure. Oftentimes the last-named owner has such con- 
fidence in the unburnable quality of his building that he 
leaves it uninsured. 

In life-insurance the premium is generally fixed accord- 
ing to the age of the insured. Mortuary tables have been 
worked out from carefully collected statistics of deaths in 
various communities, and upon the basis of these tables 
the annual sum which the insured is to pay is arrived at. 
One of the oldest of these tables is the ISTorthampton, 
" which was constructed by Dr. Thomas Price from the 

J9X 



102 ESSEXTIALS OF BUSINESS LAW 

registers kept in the parish of All Saints, Northampton, 
England, for the years 1735 to 1780 inchisive/' The tables 
which are now considered most trnstworthy are the Ameri- 
can Experience Table and the Actuaries or Combined Ex- 
perience Table. 

257. Origin of insurance. — The practise of insuring 
property appears to have originated with the mercljants 
of northern Italy, who, nnder the name of Lombards, con- 
trolled mnch of the commerce of Europe during the mid- 
dle ages. It was introduced by them into England, and 
the insurance policy of Lombard Street, London, became 
the standard form, not only for Great Britain, but for Hol- 
land and other foreign countries. The term policy is de- 
rived from the Italian polizza, meaning a note, bill, or 
ticket, and indicates that this document originated in Italy. 
Questions relating to insurance were disposed of by mer- 
chants' courts in many of the maritime cities of Europe; 
but as these courts were becoming obsolete, when the prac- 
tise of insuring property was introduced into England, it 
appears to have been customary for parties there to agree 
that all insurance disputes should be referred to " certain 
grave and discreet merchants appointed by the Lord Mayor 
of London, by reason of their experience fittest to understand 
and speedily to decide such causes." This voluntary, un- 
official tribunal was superseded in 1601 by a special court, 
created by a statute, to consist of the judge of the Admiralty 
Court, the recorder of London, two doctors of the civil 
law, two common lawyers, and eight merchants, any five of 
whom were empowered to hear and determine all causes on 
policies of assurance arising in London. This statutory 
court was in turn overthrown by the courts of common law 
which insisted upon having all insurance litigation brought 
before them for trial. 

258. Insurance law based upon mercantile usage. — It 
was natural that disputes brought before the courts of mer- 



INSURANCE 193 

chants on the Continent, and the special court of London, 
should be disposed of in accordance with the usages of mer- 
chants. Even after the common-law courts gained full 
control of such litigation they were careful to give effect 
to those usages, and the result is that many of the most 
important principles of insurance law have their origin in 
the customs of merchants of four hundred years ago. Three 
of these principles (which we shall explain hereafter) are 
the following : That the contract of insurance is one of in- 
demnity; that it requires the utmost good faith on the 
part of the insured, who is bound to make a full disclosure 
of all material facts affecting the risk; that if a part of a 
ship or cargo is sacrificed to secure the safety of the rest, 
that which is saved as the result shall contribute toward 
the loss sustained by the owner of what was sacrificed. 

259. The earliest form of insurance. — As might be in- 
ferred from what we have already said, the earliest form of 
insurance was that upon ships and their cargoes, now called 
marine insurance. In the latter part of the seventeenth 
century the headquarters for this business in London was a 
coffee-house, kept by one Lloyd. It was frequented by those 
engaged in maritime business, and its proprietor was en- 
terprising enough to gather and publish the latest shipping 
news. In this way he gave his name to the association of 
underwriters organized at his house and to the standard 
policy of marine insurance for Great Britain. At present 
Lloyd's is a corporation, whose objects are stated as follows 
in the statute which incorporated the society : '^ The carry- 
ing on of the business of marine insurance by its members, 
the protection of the interests of members; the collection, 
publication, and diffusion of intelligence and information 
with respect to shipping." Its collection of shipping news 
is so extensive and complete as to make its rooms the official 
center of such information for the whole world. In this 
country the marine insurance company which is nearest in 



194 ESSENTIALS OF BUSINESS LAW 

importance to British Lloyd's is the Atlantic Mutual of 
New' York. 

260. Fire and life insurance. — There appears to have 
been no systematic insurance against fire in England until 
after the great London fire of 1666; but once the practise 
was established it spread rapidly^ and as early as 1752 a 
fire-insurance company was organized in this country with 
Benjamin Franklin as one of its directors. In 1901 there 
were 510 fire-insurance companies in the United States, 
with a capital of $73,150,875 and total assets of $1:13,027,- 
067. They received during the preceding year $182,130,774 
in premiums, and paid for losses $108,357,171. 

Life-insurance began in England in 1706, and in this 
country in 1769, but did not attain much importance until 
near the middle of the last century. Its development in the 
United States has been quite phenomenal. In 1901 the 
amount of such insurance in force here was $12,836,461,872, 
while in Great Britain it was $3,866,000,750, in Germany 
$1,320,163,685, and in France only $695,231,550. The 
great bulk of the business in this country is done by about 
200 companies having assets of about $2,000,000,000. 
They received about $380,000,000 in premiums during 1901, 
and paid to policy-holders about $210,000,000. The num- 
ber of policies in force was somewhat in excess of 17,000,000. 

261. Other forms of insurance. — During the last cen- 
tury many other forms of insurance have sprung into being. 
Companies now insure against accident to one's person; 
against the dishonesty or carelessness of one's employees; 
against the defects in one's title to property; against bur- 
glary and housebreaking; against hailstorms, tornadoes, 
and other outbursts of natural forces ; against boiler explo- 
sions; against the death of animals by accident and dis- 
ease; against bad debts and so on. 

262. Insurance is a contract, and generally in writing. 
^ — When one party insures another, the first promises to 



INSURANCE 195 

pay money in case a certain event happens — such as death, 
or loss by perils of the sea, or by fire, or by accident — in 
consideration of the other's paying or promising to pay a 
sum called the premium. Here is an offer by the insurer 
and an acceptance by the insured. Accordingly we have a 
valid contract, unless it is in the nature of a mere bet or 
wager, and on that account illegal. It is a wager whenever 
the insured has no interest in the property, the life, or the 
transaction which is the subject of insurance. In such a 
case it is evident that the party insured would be under a 
constant and strong temptation to destroy the property or 
the life, for upon such destruction he would receive the in- 
surance money without suffering any loss. When the in- 
sured has an interest in the transaction, a valid contract 
of insurance, as we have said, is made as soon as the in- 
surer's offer is accepted by the insured. A policy or written 
agreement is not necessary, although it is usually employed. 
Consequently, if death or loss of property occurs after the 
acceptance of the offer, and before the policy is written, the 
insurer will be bound to perform his contract. 

263. Representations and non-disclosure by the insured. 
— In the chapter on contracts we called attention to the 
fact that innocent misrepresentation or non-disclosure by 
the promisee in a contract did not, as a rule, give the prom- 
iser any right to avoid it or to claim damages. Insurance 
contracts furnish an exception to this rule. Any misrepre- 
sentation or concealment of a material fact — that is, of any 
fact not known to the insurer, and which would be liable 
to affect his decision in taking the risk — will avoid the 
policy, however innocent such misrepresentation or conceal- 
ment may have been. Thus, when a party applied for insur^ 
ance on a ship and cargo at and from Genoa to Dublin, he 
was held to have represented that the ship would load in 
S^enoa, and as she loaded at Leghorn the misrepresentation, 
though innocently made, rendered the policy void. 



196 ESSEXTIALS OF BUSINESS LAW 

The reason for this stringent rule is that the insured 
Qsually knows so much more than the insurer about the 
property or life which is insured, that the parties can not 
be said to stand upon equal footing when negotiating the 
contract. Moreover, as we pointed out on a former page, 
this duty resting on persons applying for insurance to make 
a full disclosure of all material facts, originated in the usage 
of merchants. It is not strange, therefore, that it differs 
from the duty imposed by the common law on contracting 
parties. 

264. Foregoing doctrine modified in life and fire insur- 
ance. — It has long been the custom of life and fire insur- 
ance companies to require the insured to answer a great 
variety of questions, or to expressly assent to a great many 
statements, as a condition of obtaining insurance. Hence the 
courts, in this country, have generally modified the doctrine 
as to concealment or non-disclosure, stated in the preceding 
paragraph. Their view is that the insured has a right to 
suppose that every fact which the insurer thought would 
be material to the risk, was covered by the prescribed ques- 
tions or stipulations, and that he is under no legal duty to 
volunteer further information to the insurer. 

265. Warranties in insurance. — The term warranty, in 
insurance law, signifies a statement of fact or a promise 
to do something, the falsity or non-performance of which 
avoids the contract. It difi^ers in character from a repre- 
sentation, in that it is always a part of the insurance policy, 
while a representation is generally made during the nego- 
tiations for insurance and not usually embodied in the 
policy. They differ in their consequences, in that a breach 
of warranty avoids the policy whether it is material or 
immaterial, while, as we have seen, the falsity of a repre- 
sentation will not invalidate the policy unless it relates to 
a material fact. An example of a warranty is a statement in 
a fire policy that the insured building is one hundred feet 



INSURANCE 197 

from any other strugture. If, in fact, it is only seventy-five 
feet, the policy may be avoided by the insurer, although this 
difference in distance did not increase the risk, nor in any 
way contribute to the destruction of the insured building. 

266. Waiver and estoppel. — The right to avoid a con- 
tract of insurance because of misrepresentation or breach of 
warranty, may be lost either by waiver or estoppel. These 
terms were explained in the chapter on Contracts, and. we 
shall not need to spend much time upon them in this con- 
nection. A good example of waiver is the following : A fire 
policy provides that it shall be void if the building remains 
unoccupied more than ten days without written consent. 
After this warranty has been broken the insurer tells the 
insured that he will not take advantage of the breach, and 
receives a premium on the policy as a valid and subsisting 
contract. This is a waiver of his right to avoid the policy, 
and he is liable thereon precisely as though no breach had 
occurred. 

An example of estoppel is afforded by the following case 
decided by the New York Court of Appeals : The policy 
contained the clause that it should be void if the insured 
building was on leased groimd. The company knew it was 
on leased ground when it received the premium and issued 
the policy. It was held, therefore, that the company having 
taken the plaintiff's money and given a policy as a valid 
and binding contract, and thus led him to believe that, 
the property was effectively insured, was estopped, after 
the property had been burned, from denying the validity" 
of the contract, notwithstanding this statement of fact in 
the policy, that the building was not on leased ground, was 
untrue. 

267. Insurance as a contract of indemnity. — While every 
form of insurance has an element of speculation or wager- 
ing, it is taken out of the category of gambling transactions 
by the principle which has come down from the custom of 



198 ESSENTIALS OF BUSINESS LAW 

merchants^ that its object is indemnity and not profit. 
Hence, the insured must have an appreciable pecuniary 
interest in the subject of the insurance. In marine and 
fire insurance he must be the owner of the property covered 
by the policy, or of some legal or equitable interest therein, 
such as that of mortgagee, bailee, tenant, or the like. In 
life-insurance the insured must be the person on whose life 
the policy is taken out, or some one having a pecuniary in- 
terest in the continuance of that life. A wife has an insur- 
able interest in the life of her husband, and the husband in 
that of the wife ; a parent in the life of a child, and a child 
in the parent's life; a partner has an insurable interest in 
the life of his copartner, and a creditor in that of his 
debtor. 

■ 268. Insurer's rights under principle of indemnity .^ — 
This principle of indemnity produces some results in marine 
and fire insurance which are not contemplated by the in- 
sured when he takes out his policy. For example, he in- 
sures a building for twenty thousand dollars and pays the 
premium on that sum for years. The building is destro3'ed 
by fire. He calls for the sum named in the polic}^, but the 
company refuses to pay it, because the building was worth 
only ten thousand dollars. As the contract is one of in- 
demnity — that is, as its object is to save the insured from 
loss, not to enable him to make a profit out of the trans- 
faction — the company wins, and the insured gets only ten 
thousand dollars. Of course, this result may be prevented, 
'as it often is, by an express agreement in the policy that 
the value named therein shall be taken to be its true value. 
Such a policy is called a " valued policy," while an ordinary 
one is an " open policy." In some States it is declared by 
statute that the sum named in a fire policy on buildings shall 
be declared the true value of the insured property. 

Another right accruing to the insurer from this prin- 
ciple of indemnity is that of subrogation. Let us illustrate. 



INSUKANCE 199 

Through the negligence of a warehouseman or of a common 
carrier, A's goods are destroyed by fire. They are insured 
for their full value. Upon the payment of this amount to 
A the insurer is entitled to be subrogated to A's claim 
against the carrier or the warehouseman — that is, to be 
substituted for A, to be put in his place, with the right to 
recover whatever A could have recovered. This, doctrine, 
it is thought, throws the loss ultimately upon the wrong- 
doer,, and at the same time prevents the insured from get- 
ting twice the value of his property, once from the insurer 
and once from the wrongdoer. 

269. The principle of indemnity and life-insurance. — 
While the beneficiary in a life-insurance policy — that is, 
the one to whom the insurance is payable — must have a 
pecuniary interest in the life on which the policy is taken 
out, the principle of indemnity does not extend beyond 
this in life-insurance. Upon the death of a husband, 
whose life was insured for the benefit of his wife, the 
latter is entitled to the whole sum named in the policy, 
and the company can not cut this down by showing, as 
in the case of a fire policy, that the life was not worth the 
sum specified. 

" Insurers, in such a policy ,'' to , quote from a decision 
of the Supreme Court of the United States, " contract to 
pay a certain sum in the event therein specified in con- 
sideration of the payment of the stipulated premium or 
premiums, and it is enough to entitle the assured to re- 
cover if it appears that the stipulated event has happened." 
Moreover, the premium varies with the age of the insured, 
and is fixed at a rate determined by the average life of 
healthy persons, and by the certainty that the death, or 
other event, upon which the sum becomes payable by the in- 
snrer, must happen ; while in fire and marine insurance the 
event insured against may never happen, and this uncer- 
tainty is taken into account in fixing the premium. 



200 ESSEXTIALS OF BUSIXESS LAW 

270. Various forms of life-insurance. — The simplest 
form of contract is that by which tlie insurer promises to 
pay a certain sum of money upon tlie death of a desig- 
nated person in consideration of the receipt of an annual 
premium. Tlie sum may be payable to the person whose 
life is insured, in which case it belongs to his estate, and is 
collected by his executor or administrator. Or it may be 
payable to his wife, children, or creditors. At present, life- 
insurance policies are issued in a A'ariety of forms. They 
often provide for the payment of a fixed sum when the in- 
sured reaches a certain age, or for the payment to him of a 
fixed sum each year after a certain period. Under these 
and other plans, life-insurance becomes not only a security 
to the family or creditors of the insured, but a form of in- 
vestment. There are also many mutual-benefit associations, 
whose members insure each other. Upon the death of any 
one, a certain sum is payable to his estate or to some one 
■named by him, and this sum is made up by assessments on 
the surviving members. 

271. Accident-insurance. — Although this form of insur- 
ance has been known for more than three hundred years, it 
did not come into prominence until the latter part of the 
nineteenth century. The first successful venture in this 
country was made by The Travelers' Insurance Company, 
in 1863". A number of serious railroad accidents during the 
following two or three years gave the movement a great 
impetus, and at present about seventy companies are en- 
gaged in this line of insurance, carrying risks of more 
than three billion dollars, and paying out in benefits to 
policy-holders more than five million dollars annually. 

272. Objects and form of policy. — This kind of insur- 
ance has for its object the protection of the insured from 
the consequences of accidental injuries to his person. By 
the form of policy commonly used the insurer binds himself 
to pay a fi:s:ed sum (a thousand dollars or some multiple 



INSURANCE 201 

thereof) for the accidental death of a specified person, or 
for such extraordinary injuries as the loss of a hand and 
foot, or both hands or both feet, or total loss of sight ; and 
smaller sums (from five hundred to fifty dollars) for speci- 
fied injuries of a less severe nature, as well as a weekly 
sum during the time the injured person is disabled. This 
period is ordinarily limited to twenty-five weeks, and often- 
times the policy provides that the weekly indemnity shall 
not exceed the weekly earnings of the insured. Such limita- 
tions are imposed as a protection against fraudulent claims. 

273. The cost of accident-insurance. — This is not large 
for persons in non-hazardous occupations, varying from 
four to five dollars for each thousand dollars payable upon 
death or extraordinary injury, and for a weekly indemnity 
of five dollars in case of total disability, or of two dollars in 
case of partial disability. Those who are engaged in occu- 
pations of a hazardous character, such as railroad em- 
ployees or workmen in certain lines of manufacturing, are 
charged a larger rate. These rates or premiums are based 
upon tables of statistics of accidents, similar to the mortu- 
ary tables used in fixing life-insurance premiums. Accord- 
ing to these statistics, one person in every fifteen of ordi- 
nary professional and business men meets with some bodily 
injury each year. 

274. Notice to the insurer. — It is the duty of the person 
entitled to payment under an insurance policy of any kind 
to give notice to the insurer of the event insured against, 
whether that event be death, loss of property, or accidental 
injury. In the absence of an agreement on this point the 
notice may be either oral or written, and may be made 
at any time before the claim has outlawed. As a rule, how- 
ever, insurance policies contain express stipulations that 
■'lotice shall be given in writing within a specified period, 
and that certain proofs, or sworn statements, of the loss 
of property, or of the death of a person, or of an accident 



202 ESSEXTIALS OF BUSmESS LAW 

to liim shall be presented to the insurer. Such stipulations 
must be carefully complied with^ or the insurer may be dis- 
charged from all liability. 

275. Agents of insurer. — As a rule, a person engaged in 
soliciting insurance for a company is its agent, and his 
acts done within the scope of his apparent authority bind 
it. The insured ought not to place too much confidence, 
however, in the appearances of authority of such agents, nor 
in their statements on that subject. He ought to examine 
all papers which he is called upon to sign, or which he re- 
ceives, very carefully, and ought to pay especial attention 
to all statements in them concerning the authority of agents. 
Occasionally these papers declare that the agent shall not 
be deemed to be acting for the company, but shall act for 
the insured, in taking the application for the policy and 
forwarding it to the company. Such provisions are declared 
void by statute in some of our States, and the tendency of 
judicial decisions, both here and in Britain, is to treat them 
as not binding on the insured. Still, they are apt to give 
him no little trouble in case the agent has been dishonest in 
making out the application and the company refuses to 
pay. It is well for him, therefore, to decline insurance in 
a company which tenders him such papers. 

275 (a). Standard insurance policies. — Eelief has been 
obtained from some of the insurance abuses, noted above, 
by legislation requiring the use of policies in accordance 
with a standard form. Such legislation has been adjudged 
constitutional. New York ]3rovides standard forms both 
for life and fire insurance, and its statutes on these topics 
have formed the models for those of several other States. 
It has been said of these policies that the courts have recog- 
nized that their provisions are drawn with better regard to 
the interests of both parties than those of the older policies. 
They are giving less emphasis to the maxim that the law 



. INSUKANCE 203 

abhors a forfeiture, and more to the rule that contracts 
should be enforced fairly, according to their terms. It is 
wise 'for the insured to insist upon having a policy of the 
standard form. 

275 (b). State insurance. — Workmen's compensation 
statutes frequently provide a state fund for the protection 
of employer and employee. In New York and some other 
States the State is not liable beyond the amount of such 
fund, which consists of premiums paid to it; of property 
and securities acquired by the use of moneys belonging to 
the fund and of interest thereon. This scheme has been 
criticized as affording incomplete protection to employees, 
while it secures to the employer, who insures in the fund a 
release from all liability under the act, upon the payment 
of his premiums. 

Even this limited form of State insurance is looked upon 
by many as an unwise invasion by government of a field 
which ought to be left to individual business enterprise. It 
is said that in countries, where State insurance is a monop- 
oly, it has not demonstrated its relative cheapness in com- 
parison with private insurance; and that when it competes 
on equal terms with private insurance it gets but a small 
proportion of the business. In short, it is asserted that 
State insurance has never demonstrated its relative cheap- 
ness for a complete and efficient service. On the other 
hand, it is contended that the rates of insurance, fixed by a 
State Fund Commission, as in New York, will operate as 
a check upon the rates charged by stock and mutual com- 
panies. 

Great Britain has a National Insurance Act (1911, 1 
and 2, Geo. Y, Ch. 55), which provides for insurance against 
loss of health, and against unemployment. The cost of 
insurance is divided among employers, employees and the 
State, but there is no guaranty by the State that the fund 



204 ESSEXTIALS OF BUSIXESS LAW 

shall be sufficient to satisfy all claims ui^on it. An inter- 
esting feature of the act is its invitation to other conntries 
to make the scheme international, by admitting transfers of 
insured persons to and from such countries, proAdded they 
accord reciprocal rights to employees. 

275 (c). War risk insurance. — The Federal Govern- 
ment has provided financial protection for its army and 
navy forces in three forms. It compels each member who 
is married to allot $15 a month from his pay to his wife 
and children, and it adds thereto allowances to such depend- 
ents, varying from $5 to $50 a month. It also provides 
compensation to a soldier's or sailor's widow, children and 
dependent father or mother, ranging from $20 to $75 a 
month in case of death; and in case of disability it pays 
him from $30 to $100 a month, according to the size of 
his family. In addition to these allotments and allowances 
the Government insures him against death or total perma- 
nent disability. He makes application for this in accord- 
ance with prescribed regulations. Provision is made for 
the continuance of this insurance after leaving the service, 
without medical examination. In other words "this insur- 
ance, backed by all the resources of the United States, en- 
ables the soldier or sailor to insure his insurability, regard- 
less of his physical condition after the war." 

As the government bears the expenses of insurance ad- 
ministration and the excess mortality and disability cost 
resulting from the hazards of war, the rates of insurance 
are very low, as compared with those which must be charged 
by ordinary insurance companies. The rate varies with the 
age of the insured. If he is 21 it is 65 cents a month per 
$1,000, so that he can easily pay from his salary the pre- 
mium upon the maximum amount of $10,000. If he is 
totally and permanently disabled, montlily installments are 
paid to him during his life. In case of death the insurance 



- mSUEANCE 205 

may be made payable to his widow, child, grandchild, par- 
ent, grandparent, brother or sister, but to no one else. 

In addition to the low rates, this form of insurance has 
the advantage of being free from taxation and from claims 
of creditors. 



CHAPTER YIII 

negotiable paper 

§ 1. Its Oeigin" and Objects 

276. Negotiable paper originated in the usage of mer- 
chants. — The earliest form of negotiable paper known to 
English law is the foreign bill of exchange, which appears to 
have been introduced into England by Italian merchants 
during the thirteenth century. It was used only in deal- 
ings between merchants of different countries. Here is a 
specimen taken from an English law-book printed in 1655 : 

Laiis Deo, in London this 17th November, 1654, for £100. 

At usance ^ pay this my first bill of exchange to Mr. Cornelius 

Yande B., or order, One Hundred pounds sterling at 36s. Sd. Flemisli 

per pound sterling for value here received of Mr. John C. make 

good payment, and put it to account, as per advice. 

Your loving Friend 
To Mr. Peter E. Thomas D. 

Merchant 
in 
Amsterdam. 

If any dispute had arisen between the parties to such 
a bill while merchants' courts were in existence in England, 

1 "Usance," in a London bill on Amsterdam, meant one month at 
that time. The reader will observe that the rate of exchange is fixed 
in the foregoing bill, and the holder was entitled to receive in Amster- 
dam one hundred times thirty-six shillings and eight pence of Flemish 
money. 

206 



NEGOTIABLE PAPER 207 

it would have been disposed of in one of those courts — in a 
•court staple or a court pepoudrous — which we described in 
the second chapter. With the opening of the seventeenth 
century, controversies growing out of negotiable paper 
found their way into the common-law courts. The earliest 
reported case of this kind was decided in 1603. Of course, 
the merchants' courts decided all questions brought before 
them in accordance with the customs of merchants, and 
for a time the common-law courts appear to have dealt with 
these questions in much the same way. Not only that, but 
those courts followed for a time the merchants' courts in 
holding that only merchants could be parties to a bill of 
exchange. In this way the usages of merchants were gradu- 
ally turned into rules of law. . 

277. Why foreign bills of exchange were used. — If we 
examine the bill set out in the preceding paragraph we will 
observe that four parties are concerned. " Mr. John C," 
residing in London, wishes to pay one hundred pounds to 
" Cornelius Vande B.'' in Amsterdam. To save himself 
the necessity of carrying this money from London to Am- 
sterdam he pays it in London to " Thomas D.," who has a 
correspondent in Amsterdam, " Mr. Peter E.'' For the 
money thus paid in London, " Thomas D." draws his bill 
of exchange (and is therefore called the drawer) on "Mr. 
Peter E." in Amsterdam (who is called the drawee), di- 
recting him to pay there to " Cornelius Vande B." (who is 
called the payee) an equal amount of money. As soon 
as this order is complied with " John C.'s " payment of 
one hundred pounds to " Cornelius Vande B." is made, with- 
out any money having been carried by the former to the 
latter. In other words, a debt due from " John C." to 
" Cornelius Vande B.'' is exchanged for a debt due from 
" Peter E." to " Thomas D." Hence the term " bill of ex- 
change," an instrument by which a debt in one place is 
exchanged for a debt in another, 



208 ESSENTIALS OF BUSINESS LAW 

278. Inland bills of exchange. — About the middle of the 
seventeenth century bills of exchange came into use be- 
tween merchants in different parts of England. Their 
validity was questioned by persons who thought that a bill 
of exchange could be lawfully used only between merchants 
of different countries, but the courts adopted the usage of 
domestic merchants upon this point, as formerly they had 
adopted the usage of foreign merchants. An inland bill did 
not differ originally in form from a foreign (or in the 
language of early writers "outland") bill. It was drawn 
in sets of two or three, so that if the first bill was lost or 
accidentally destroyed, one of the others might reach its 
destination and be paid. If the reader will look at the form 
set out in the first paragraph of this chapter he will notice 
that it is the first bill of the set. The second bill would 
be the same, except that in lieu of the words " pay this my 
first,^' it would have these words, " not having my first, pay 
this my second.^^ And the third bill would have the words, 
" not having my first or second, pay this my third.'^ At 
present inland or domestic bills are rarely drawn in sets. A 
single instrument only is issued, and this rarely names the 
person by whom the money has been paid to the drawer of 
the bill. 

In this country, an inland bill is one which purports on 
its face to be drawn and payable within the same State or 
Territory. Any other bill is a foreign one, whether drawn 
in one State and payable in another, or whether payable in 
a foreign country. Accordingly, a bill drawn in Philadel- 
phia on Pittsburg, Pa., is an inland bill. One drawn in N"ew 
York on Boston, Chicago, Cleveland, St. Louis, or St. Paul, 
is a foreign bill. 

279. Promissory notes. — These were the third form of 
negotiable paper to gain currency in England. They came 
into use during the close of the seventeenth century, but 
Chief-Justice Holt refused to give effect to the usage of 



NEGOTIABLE PAPER 209 

merchants relating to them. Thereupon Parliament 
stepped in and enacted that such notes should be negotiable 
like bills of exchange ; doing this, it declared, with " the 
intent to encourage trade and commerce/' A promissory 
note payable at a bank is in this form : 



.00. New York, February 1, 1903. 

Three months after date, I promise to pay to the order of James 
Smith, Five Hundred Dollars, at The Corn Exchange Bank, Univer- 
sity Branch, with interest. Value received. 

John Jones. 

280. Later forms of negotiable paper. — No sooner had 
promissory notes been declared negotiable by Parliament 
than goldsmiths and other bankers in London began to 
issue what are now known as bank-notes — that is, written 
promises to pay certain sums of money to the bearer of 
the paper on demand. Next came checks, which are simply 
a species of bill of exchange. As now defined by statute in 
this country, " a check is a bill of exchange drawn on a bank 
and payable on demand." Following is a sample : 



< 

C5 


No. 246. New York, March 1, 1902. 
THE CORN EXCHANGE BANK 

UNIVERSITY BRANCH 

Pay to Teachers College or order 


One Hundred Dollars 


$100.00. William Blackstone. 



During the last century, various other forms of contract 
were devised by the mercantile community for use, similar 
to that made of bills of exchange, promissory- notes, and 
checks — that is, as securities for money. In most cases the 
courts — both in England and in this country, have adopted 
and given effect to such mercantile usages, and have held 



210 ESSENTIALS OF BUSINESS LAW 

the various forms of contract;, thus devised and used, to be 
negotiable paper. 

Here, again, we find rules of law, which had their origin 
in the usages of business men. As these usages were not 
contrary to an}^ principles of positive law, and tended to the 
convenience and advancement of trade, the courts were 
quite willing to give them judicial sanction and make them 
a part of the law of the land. 

281. Formal requisites of neg-otiable paper. — While we 
have set out particular forms of a bill of exchange, a prom- 
issory note, and a check, this has not been done for the 
purpose of giving the impression that those exact forms 
must be used. It was decided long ago that although the 
usage of merchants required negotiable paper to be in 
writing (so that there should be no dispute about its terms), 
it did not prescribe any precise form of words. And yet, 
negotiable paper must possess certain characteristics, which 
may be stated as follows: (a) It must be in writing and 
signed; (&) it must contain an unconditional order or prom- 
ise to pay a certain sum of money; (c) it must be payable 
at a determinable time; (d) it must be payable to order 
or to bearer; (e) a bill of exchange (including check) must 
name or indicate the drawee. Let us consider these char- 
acteristics very briefly. 

282. Parties who must sign. — In the case of a bill of ex- 
change the first party to sign it in the regular course of 
business is the drawer, and the next one is ordinarily the 
drawee — that is, the person on whom the bill is drawn — 
who writes across the face of the bill his name, and over 
his signature the word " accepted." ^ Thereafter he is 
called the acceptor instead of the drawee. If the bill is 
pa3^able to the order of some person he (who is called the 

• Formerly in England the drawee of a bill could accept it orally, 
and such is still the rule in some of our States. But by the usage of 
merchants, as well as by modern statutes in England and in many of 



NEGOTIABLE PAPER 211 

payee) must indorse it if he wishes to transfer the instru- 
ment to another person. This is ordinarily done by writ- 
ing his name on the back of the bilL 

A promissory note must be signed by the maker, and if 
payable to order the payee must indorse it, as in the case 
of a bill of exchange, in order to pass title. A check must 
be signed by the drawer, but the bank on which it is drawn 
is not expected to accept it, and therefore does not as a 
rule sign it. The payee may transfer it by indorsement, as 
he may a bill or a note. 

283. An unconditional order or promise. — It is evident 
that an order from one man to another to pay a sum of 
money, upon some condition, could not perform the func- 
tions of a bill of exchange ; it could not be used in lieu of 
money to pay a debt at a distant place. A payee or indorsee 
would not take it instead of money if its payment by the 
drawee depended upon an imcertain event. For example, 
A draws an order on B to pay a thousand dollars to C, in 
case certain goods which A has shipped to B arrive and sell 
for that amount or sum. If they do not arrive, or do 
not sell for a thousand dollars, neither A nor B is bound 
to pay anything on the order to C. Of course C will not 
take such an order in lieu of a thousand dollars in money. 
For similar reasons a promissory note must contain an 
unconditional promise to pay a certain sum of money. The 
term " money " in this connection means that which is 
legal tender in payment of debts at the place where the bill 
or note is payable. Legal-tender money of the United 
States was described in the chapter on Contracts. 

284. Time of payment. — This is usually fixed at a cer- 
tain number of days or months after date, or at a prescribed 
date in the future. Such definiteness of date, however, is 

our States, an acceptance must be in writing^ on the bill. This is a 
proper requirement, for it enables any one who receives the bill to tell 
at once whether it has been accepted. 



21^ ESSENTIALS OP BUSINESS LAW 

not essentiaL A promise to pay on demand^ or on the oc- 
currence of an event which is certain to happen, is suf- 
ficiently definite. For example, A promises to pay to the 
order of B a thousand dollars on the death of C. This is 
deemed payable at a determinable future time, for the death 
of C must happen at some time, and the paper would be 
treated as negotiable. Had the promise been to pay when 
C married, or when he became twenty-one years of age, the 
paper would not be negotiable, for neither of those events 
is certain to happen. 

285. Payable to order or bearer. — An instrument may 
be in all other respects a bill of exchange or a promissory 
note, and yet, if it is not payable to order or bearer it is 
not negotiable. It is true that neither the word " order " 
nor " bearer " is necessary, although one or the other is 
ordinarily used; but if these are not employed some other 
language of equivalent meaning must take their place. By 
the use of such words or language the parties to the paper 
authorize the payee to transfer it, and bind themselves to 
pay it to such transferee or to any subsequent holder. 

It is here that we have one of the striking differences be- 
tween negotiable paper and a common-law contract, a dif- 
ference due to the usages of merchants. In our chapter on 
contracts we saw that the common law did not permit the 
assignee of a contract to sue upon it in his own name, but 
forced him to sue in the name of his assignor. The law 
merchant, as developed in the merchants' courts and after- 
ward adopted by the common law, gave the right to a 
transferee of negotiable paper to sue in his own name any 
prior party on the bill or note. 

286. Bill of exchange must designate a drawee. — It is 
very clear that you can not have a bill of exchange without 
a drawee. The order for the paA'ment of money must be 
directed to some one or it is good for nothing as an order. 
The order may be so drawn, however, as to contain a prom- 



NEGOTIABLE PAPER 213 

ise by the drawer to pay money, in which case, although no 
drawee is named or designated in any way, the payee may 
treat it as a promissory note. Ordinarily, then, a bill of 
exchange, before it is negotiated by the payee, has three 
parties — the drawer, the drawee (who upon acceptance be- 
comes the acceptor), and the payee. But it is not necessary 
that these three parties be different persons. The payee may 
be the same person as the drawer, or the same person as the 
drawee. Indeed, it has been held that one person may fill 
all three places, and be at once drawer, drawee, and payee 
of a bill. In such a case, however, the holder has his option 
to treat the paper as a bill or as a promissory note of the 
acceptor. 

§ 2. Liability of the Different Parties to Negotiable 

Paper 

287. Liability of acceptor. — Until the drawee of a bill 
accepts it he is under no liability on the paper, and the 
same rule is generally applied to a bank on which a check 
is drawn.^ The drawee or the bank may be liable to a 
suit by the drawer for not honoring the paper— that is, ac- 
cepting the bill or cashing the check — but he is not liable on 
the paper itself. He has not become a party to it. The 
drawee does become a party by acceptance. By this act he 
binds himself absolutely to pay the bill in accordance with 
its terms. It is true that he does not state such a promise 
in words. Ordinarily he writes across the face of the bill 
" Accepted," and below that his signature, but the law 
merchant gives to that word and signature this meaning: 
" Being indebted to the drawer of this bill, I hereby agree 
to pay it according to its terms, and to charge the amount 
to the drawer's account." 

^ In a few of our States it is held that a bank which refuses to pay 
a check, when it has funds of the drawer which should be applied to 
its payment, is liable to an action by the holder of the check. 



214 ESSENTIALS OF BUSINESS LAW 

288. Liability of the maker of a promissory note. — This 
is absolute, like the liability of an acceptor of a bill, and it 
is stated in express terms. Even when the bill or note is 
payable at a designated time and place its presentment at 
such time and place is not a condition of the acceptor's or 
maker's liability. As a rule, of course, the holder does pre- 
sent it and ask for payment, but he is not bound to do so, 
in order to maintain a suit against the acceptor or maker. 
If, however, he does sue without so presenting it, the ac- 
ceptor or maker will escape the payment of the costs of the 
suit and interest by showing that he was ready and able to 
pay at the stipulated time and place. 

289. Other engagements of acceptor and maker. — In 
addition to his absolute promise to pay, the maker of a note 
engages that the payee is in existence and has legal capacity 
to indorse the paper. The acceptor of a bill makes the same 
engagement; and he also agrees that the drawer is in ex- 
istence, that his signature is genuine, and that he has legal 
capacity and authority to draw the bill. Accordingly, a bank 
which pays a check, or a drawee who accepts or pays a bill, 
having a forged signature of the drawer, must stand the loss, 
as against a person who paid value for the paper in igno- 
rance of the forgery. The drawee is bound to know the 
drawer's signature. 

290. Qualified acceptance. — Thus far we have been cor 
sidering the case of the regular acceptor. At times, how- 
ever, the drawee is not willing to accept the bill in ac- 
cordance with its terms. He insists upon qualifying his 
acceptance, by adding some condition, such as making pay- 
ment by him conditional upon his receiving goods or funds 
from the drawer, or such as changing the time or the place 
of pa3^ment. The holder has the right to say to such 
drawee : " I will not take your qualified acceptance. If you 
will not accept absolutely, I shall treat the bill as dishonored 
by you, and have it protested at once." Indeed, this is the 



NEGOTIABLE PAPER 215 

only safe coiirse'^for.the holder to pursue; for if he receives 
a qualified acceptance he discharges the drawer and in- 
dorsers from their liability on the paper, unless they have 
authorized or assent to such acceptance. This is entirely 
reasonable, for they have a right to stand upon the very 
terms of the paper which they signed. 

291. Certified checks. — A check, as we have pointed out 
in a preceding paragraph, is not intended for acceptance 
by a bank. In the ordinary course of business it is paid 
and canceled by the bank on which it is drawn upon its pre- 
sentment there. Occasionally, however, a check is certified 
— that is, the bank by the proper officer writes or stamps 
across the face of the check " accepted," " good," or some 
equivalent word, and writes the date and the signature of 
the officer — generally of the cashier or teller. A certifica- 
tion, so far as the bank is concerned, is treated as the 
equivalent of an acceptance. Therefore, the bank is liable 
to the holder of the chock, as it would have been had it ac- 
cepted a bill of exchange. The effect of a certification upon 
the drawer's liability depends upon who secured it. If the 
holder did, it discharges the drawer entirely, for the lat- 
ter's direction to the bank w^as to pay and cancel the check, 
not to certify and thus keep it in circulation. The holder 
by taking the certification instead of cash accepts the bank 
as his sole debtor and releases the drawer. But no such 
consequence follows a certification made at the request of 
the drawer. He procures the certification in order to add the 
credit of the bank to his own credit on the paper, and thus 
induce the payee to take it in lieu of money. He uses it as 
an accepted bill of exchange, and is liable as the drawer 
of one. 

292. Liability of the drawer. — If the reader will ex- 
amine a bill of exchange or a check, he will discover that 
the drawer does not expressly promise anything. He simply 
directs the drawee to pay money to the order of a desig- 



216 ESSENTIALS OF BUSINESS LAW 

nated person or to bearer. Here, again, the law merchant 
implies from the conduct of a party certain promises or 
engagements. For value received by him, the drawer draws 
a bill on his debtor, and delivers it in lieu of money. By so 
doing, says the law merchant, he engages that the payee is 
in existence and has capacity to indorse the bill; and he also 
engages that the drawee will accept and pay the bill, if duly 
presented ; and further, that if the drawee does not, he will 
pay it to the holder, provided due proceedings upon dishonor 
are taken. It will be observed that the drawer's liability 
is not only implied, but that it is conditional for the most 
part. The acceptor promises absolutely to pay. The 
drawer's engagement to pay is conditional upon due pre- 
sentment to the drawee or acceptor, and upon due proceed- 
ings being had on dishonor. AYhat those proceedings are 
we shall consider hereafter. 

293. Liability of indorser. — This also is implied and 
conditional. Take, for example, the simplest form of in- 
dorsement, that which is known as an indorsement in blank. 
This consists simply in the signature of the payee written 
on the back of a bill or note and the delivery of the paper 
to the indorsee — i. e., the person to whom title is trans- 
ferred by the indorser. From that signature and act of 
transfer the law merchant implies the following engage- 
ments on the part of the indorser: (a) That the bill or 
note in question is genuine and valid in every respect. (&) 
That his title to it is perfect, and that he gives such title 
to the indorsee, (c) That all parties prior to him on the 
paper had full legal capacity to contract, (d) That the 
paper will be accepted or paid, if duly presented, and that 
if it is not he will pay it, provided due proceedings upon dis- 
honor are taken. 

294. Various kinds of indorsement. — Besides the blank 
indorsement described in the preceding paragraph there 
are other kinds, of which the most important are the spe- 



NEGOTIABLE PAPER 217 

cial, the restrictive, and the qualified indorsement. Sup- 
pose John Smith is the payee of a bill or note; a special 
indorsement by him would be in this form: " Pay to John 
Jones or order, John Smith." This indorsement specifies 
the person to whom or to whose order the paper is to be 
paid thereafter, and the indorsement of John Jones is neces- 
sary to the further negotiation of the paper. A restrictive 
indorsement may take one of the following forms : " Pay to 
John Jones only, John Smith," or " Pay to John Jones for 
collection, John Smith," " or " Pay to John Jones for the 
account of Jesse James, John Smith." In either case it 
will be observed the indorsement restricts the full and free 
negotiation of the paper thereafter. A qualified indorse- 
ment usually consists in adding " without recourse," or 
words of similar import, to the signature of the indorser. 
This indorsement does not affect the further negotiation of 
the paper, but it does relieve the indorser from all liability 
to pay the paper, if prior parties do not. 

295. Accommodation parties. — Originally there were no 
accommodation parties to negotiable paper, for as we have 
seen, such paper was used only to transfer trade debts from 
one place to another. At present, however, negotiable paper 
of all kinds is often used as an instrument of credit. It 
serves as a species of paper currency. A wishes to borrow 
ten thousand dollars at his bank. He is told that if B will 
make a note to his order, or will accept a bill of exchange 
drawn by him to the bank's order, he can have the money. 
Thereupon B becomes the maker of the note, or the ac- 
ceptor of the bill, to accommodate A and enable him to bor- 
row the money. B is liable to the bank on such paper, or to 
any subsequent holder of it. It is true B did not get 
any benefit from the transaction ; he simply lent his name to 
A. But the bank sustained a detriment — parted with ten 
thousand dollars — at B's request and up^n his promise to 
pay that sum. Accordingly, here is a valid contract between 



218 ESSENTIALS OF BUSINESS LAW 

B and the bank. But B is nnder no obligation to A on the 
bill or note. It is true he appears to be on the face of the 
paper. If A sues B, however, the latter can show that there 
was no consideration for his promise to the former, and 
hence no contract binding on him. Of course, a person may 
be an accommodation drawer, or indorser, as well as maker 
or acceptor. In either case he is liable to a holder for value 
of the paper, but not to the party for whose accommoda- 
tion he signed. 

296. Delivery necessary to the validity of negotiable 
paper. — It is a fundamental rule of the law merchant that 
any contract on a negotiable instrument, whether that of 
acceptor, maker, drawer, or indorser, is incomplete and 
may be revoked, until delivery thereof with the intent to 
give effect thereto. Hence, if A makes or indorses a note 
to B's order, intending to deliver it to him the next day, 
but dies before delivery, B has no title to the paper. Again, 
if A makes a note to B's order and hands- it to him, upon 
condition that it shall not take effect until B delivers certain 
property to him, and B never delivers the property, the note 
is not a contract in B's favor. In such a case, however, B 
may, if he is dishonest, give a perfect title to the note to a 
bona fide holder. What constitutes such a holder we shall 
explain hereafter. 

§ 3. Peoceedin"gs on Dishonor 

297. How negotiable paper is dishonored. — A promis- 
sory note is dishonored by the maker's failure or refusal to 
pay it at maturity. A check is dishonored by the bank's re- 
fusal to cash it upon due presentment. A bill of exchange 
is dishonored by the drawee's refusal to accept it when duly 
presented, or, if he has accepted it, by his failure or refusal 
to pay it at maturity. 

298. What is due presentment? — We have seen that pre- 
sentment of negotiable paper for payment is not necessary 



NEGOTIABLE PAPER 219 

in order to maintain an action against an acceptor of a bill 
or the maker of a note unless such presentment is expressly 
stipulated for in the paper. Such presentment is necessary, 
however, in order to maintain an action against the drawer 
or indorsers, unless the paper was made for their accommo- 
dation. This follows from the conditional character of 
their liability, which we described in the last section. 

Let us now consider what constitutes due presentment 
of negotiable paper. It usually involves an exhibition of the 
paper and a demand of payment by the holder or his au- 
thorized agent. As a rule presentment is made by an agent 
— a notary public — whenever the holder has reason to be- 
lieve it will be dishonored. If the paper is payable, by its 
terms, at a particular place — a designated bank, for instance 
— it must be presented there. If no place of payment is 
specified, but the address of the acceptor or maker is given, 
it may be presented at such address. Otherwise it may be 
presented at the acceptor's or maker's place of business or 
his residence; or if he has neither, then at his last known 
place of business or residence, or to him personally wherever 
he can be found. 

299. Time of presentment. — In the absence of some valid 
excuse, the paper must be presented at a reasonable hour of 
the day when it is payable, which is also called the day of its 
maturity. This is ordinarily fixed by the paper itself — e. g., 
thirty days, three months, or some other period after date. 
The law merchant added certain days of grace — usually 
three days to this period. Accordingly, a note or bill, dated 
April 1, and payable three months after date, matured or 
became due on July 4. But as that is a " great holiday " 
in this country, the law merchant would make the paper 
payable on July 3 — that is, on the second day of grace. 
In some of our States days of grace are abolished by stat- 
ute, and paper which falls due on a legal holiday or on 
Sunday is made payable on the next secular or busiwes^ day. 



220 ESSENTIALS OF BUSINESS LAW 

Such is the present rule in New York. Hence, if negotiable 
paper falls due by its terms on July -i, and that day is 
a Saturday, the proper day for presenting it for payment is 
the following Monday — July 6. 

300. Reasonable hour. — This varies according to the 
place of payment. AYhen the paper is payable at a bank it 
must be presented during banking hours. If those hours be- 
gin at ten in the forenoon and close at three in the after- 
noon a reasonable hour means an hour between ten and 
three. When the paper is payable at a person's place of 
business, it must be presented during ordinary business 
hours. When it is payable at his residence, it must be pre- 
sented after the customary hour of rising and before the 
customary hour of going to bed — such hours being deter- 
mined not by the habits of the individual upon whom pre- 
sentment is made, but by the general custom of the neigh- 
borhood. 

301. Delay in makings presentment is excusable when- 
ever it is caused by circumstances beyond the holder's con- 
trol. The following are examples of such a state of things : 
The interruption of intercourse with the place where the 
paper is payable by reason of war or of the prevalence of 
a contagious disease such as smallpox; the miscarriage of 
the mails ; ' illness of the holder which disables him from 
arranging for prompt presentment. As soon as the cause of 
delay ceases to operate, presentment must be made with 
reasonable diligence. 

302. Presentment may be dispensed with. — Not only is 
delay in presenting paper excusable, as stated in the last 
paragraph, but at times it may be dispensed with altogether. 
If the drawer and indorsers waive presentment, or if the 
bill or note was accepted or made for their accommodation, 
presentment is unnecessary. So, if the acceptor or maker is 
fictitious ; and again, if, after reasonable diligence, pre- 
sentment can not be made; as where the acceptor or maker 



. iSTEGOTIABLE PAPER 221 

can not be found within the State, upon reasonable inquiry, 
and has no known place of business or of residence within the 
State. For a holder is not under any duty to go outside the 
State to make presentment unless payable at a stated place. 

303. Protest of negotiable paper. — We have said that the 
holder usually employs a notary public to present negotiable 
paper for payment, if there is reason to believe it will not 
be paid. This he does for two reasons : First, because the 
notary is familiar with the steps to be taken upon the 
dishonor of the paper. Second, because a formal protest 
of the paper is regularly made by a notary who has a seal, 
and who is thus able to make an official certificate of what 
he has done. We say this is regularly made upon the dis- 
honor of negotiable paper, whether foreign or ■ domestic; 
whether a bill of exchange, a check, or a promissory note. 
It is not necessary, however, in every case. The only form 
of negotiable paper which must be protested in order to 
hold the drawer and indorsers is the foreign bill of ex- 
change. And, it will be remembered, a bill drawn in one 
of our States and payable in another is a foreign bill. 

304. Why foreign bills must be protested. — Simply be- 
cause such w^as the ancient custom of merchants. We can 
easily understand the convenience of such a protest. A New 
York merchant draws a bill on his London debtor and gets it 
discounted by a New York banker. It is sent to London 
and dishonored by the drawee. It then comes back to the 
New York banker, who calls upon the merchant for the 
money advanced to him on the bill with interest and the ex- 
penses of protest. If the banker had to call from London 
the person who presented the bill and to whom refusal of 
acceptance or payment was made in order to prove the dis- 
honor of the paper it would be a great burden. According- 
ly, mercantile usage provided, at an early day, that a cer- 
tificate of protest by a notary public should be received in 
lieu of his personal testimony. Of course, such a certificate 



222 ESSENTIALS OF BUSINESS LAW 

is not conclusive evidence of the truth of its statements. 
The party against whom it is offered may show, if he can, 
that it is false; but until that is done courts everywhere 
will accept it as sufficient proof that the paper has been dis- 
honored. 

305. Different sig-nifications of protest. — The term 
'^ protest '^ is often used in a loose way to include all the 
steps taken upon the dishonor of a bill or note — present- 
ment and demand, refusal, protest by the notary, and notice 
of dishonor. As a technical term of law, however, it means 
simply to bear public witness — to declare in a formal man- 
ner — that a certain negotiable instrument has been dis- 
honored. 

306. Manner of protesting paper. — Upon the dishonor 
of the paper the notary usually makes a note or memo- 
randum of the fact on the instrument. This should be 
done on the day of its dishonor. Thereafter he fills out, 
signs, and attaches his seal to the formal certificate of pro- 
test, of which the following is a specimen : 



United States of America, 

State of New York. 

City and County of New York. 



I ss. : 



On the 24th day of February, 1902, at the request of the Cork 
Exchange Bank, University Branch, I, T. B. Johnson, a Notary 
Public of the State of New York, duly commissioned and sworn, did 
present the original Promissory note hereunto annexed, at the Corn 
Exchange Bank, University Branch, No. 2902 Broadway, New 
York City, the place at which it was payable, and demanded pay- 
ment, which was refused, . 



Whereupon, I, the said Notary, at the request aforesaid, did Pro- 
test, and by these presents do publicly and Solemnly Protest, as well 
against the Indorser of the said note as against all others whom it 
doth or may concern, for exchange, reexchange, and all costs, dam- 



NEGOTIABLE PAPER 223 

ages, and interest already incurred and to be hereafter incurred for 
want of payment of the same. 

Thus done and "protected in the city of New York aforesaid. 
In Testimonium Veritatis. 
\ notary's I T. B. Johnson, Notary Public, 

I SEAL. S Corn Exchange Bank, University Branch. 

It will be observed that the certificate of protest has the 
bill or note, or a copy thereof, annexed to it, and that it 
specifies the time and place of presentment, the fact that a 
presentment had been made, and the cause for protesting 
the paper. 

307. Notice of dishonor. — Although, as we pointed out 
above, this is often included in the term protest, the two 
are entirely distinct. A protest, as we have seen, is neces- 
sary only in the case of a foreign bill of exchange; but a 
notice of dishonor is just as necessary in the case of an 
inland bill, of a check, or of a promissory note as in the 
case of a foreign bill. A protest is in writing, and attested 
by the notary's signature and seal. A notice of dishonor 
may be in writing or oral, and may be given personally or 
sent through the mails. It may be quite informal. Any 
notice is sufficient which fairly identifies the instrument 
and indicates that it has been dishonored. Of course, it is 
safer to have the notice in writing, in order to avoid any 
dispute about its terms. The following is a standard form 

used by notaries : 

New York, May 2. 1902. 
Please to take notice that a note made by John Jones for 
$500 and interest, dated February 1, 1902, payable at the Corn Ex- 
change Bank, University Branch, May 1, 1902, and indorsed by you, 
has been dishonored, payment having been duly demanded at its 
maturity and refused, and that said Note has therefore been pro- 
tested for non-payment and thit the holders look to yon for pay- 
iiient thereof, and of all damages, costs, and charges thereon. 
Yours, etc., 

T. B. Johnson, Notary Public^ 
To James Smith. Corn Exchange Bank, University Branch 



224 ESSENTIALS OF BUSINESS LAW 

308. Why notice of dishonor is required. — This is be- 
cause the contract of a drawer of a bill, or of the indorsei 
of a bill or a note is conditional. His promise is not abso- 
lute, it will be remembered, like that of the acceptor or the 
maker. He undertakes to pay provided due proceedings 
upon dishonor are taken. One of these proceedings, ac- 
cording to immemorial usage of merchants, is giving notice 
of dishonor to the drawer and indorsers. This is certainly 
a perfectly fair usage. In the ordinary course of business 
the drawer draws the bill against funds in the drawee's 
hands. If the drawee refuses to accept, or, having accepted, 
refuses to pay, the drawer ought to be promptly notified 
so that he may get his funds out of the hands of one who 
is treating him unfairly, perhaps dishonestly. A similar 
reason exists in favor of the payee of a note or of a bill 
who has indorsed it to a third party. The bill or note is 
given to the payee for a debt owing to him by the drawer or 
the maker. If this debtor does not pay it at the time and 
in the manner agreed upon in the bill or note, the creditor 
should be notified at once, so that he may take immediate 
steps to compel payment. 

309. Time of giving notice. — Three centuries ago the 
usage of merchants on this point was not very definite; it 
only required notice to be given within a reasonable or 
convenient time. At present the rule is quite definite, al- 
though special and unusual circumstances may excuse de- 
lay, or may relieve the holder altogether from giving notice. 
The rule is as follows : If the party giving notice and the 
one receiving notice reside in the same place, personal notice 
must be given during the day following the dishonor, and 
notice by mail must be put into the post-office in time to 
reach him in usual course on the day following dishonor. If 
the parties live in different places, and notice is given by 
mail, it must be deposited in the post-office in time to go by 
mail the day following dishonor, or if there be no mail at a 



NEGOTIABLE PAPER 225 

convenient hour on that day, by the next mail thereafter. 
When notice is given otherwise than by mail it must be 
given within the time* the notice would have been received 
in due course of mail had it been deposited in the post- 
office within the time specified in the last sentence. 

310. Where notice by mail should be sent. — The use of 
the mails for giving notice of dishonor had its origin in 
business usage, but it is now regulated quite generally by 
statute. As a rule, when notice of dishonor is duly ad- 
dressed and deposited in the post-office, the sender is deemed 
to have done his full duty, and the risk of miscarriage by 
the mails is thrown upon the drawer or indorser. What is 
a proper address depends on the facts of each case. If the 
drawer or indorser has added an address to his signature the 
notice must be sent there. If the address is indefinite, as 
" John James, New York city," instead of having the street 
and number of his residence or place of business, the fault 
is John James's and not the sender's. If no address is 
added to the signature, then the sender must use reason- 
able diligence to discover the party's whereabouts. If, after 
such diligence, he fails, he is excused from giving notice. 
If he is successful, notice must be addressed as follows : 
either to the party's place of residence or to his place of 
business, or to the post-office where he is accustomed to 
receive his letters, though that may not be the post-office 
nearest his residence. 



§ 4. The Rights of a Holder 

311. How acquired. — The rights of a holder of negotiable 
paper are acquired by its negotiation to him. The term 
negotiation is here used in a technical sense, it must be 
borne in mind. We often speak of the negotiation of a treaty 
between nations or of a contract between individuals. The 
"word has then a very different meaning to that which at- 



226 ESSENTIALS OF BUSINESS LAW 

taches to it in its present connection. It includes all the acts 
and words of the parties leading up to their final agreement. 
In the law of negotiable paper, howaver, negotiation means 
such a transfer of the paper as gives to the transferee a right 
to sue upon it in his own name. It may, also, and generally 
does give him a right to enforce the paper free from de- 
fenses which could have been set up against the transferor. 
If the paper is payable to bearer its negotiation consists in 
its transfer by mere delivery; if payable to order, in its 
transfer by indorsement, which, it will be remembered, also, 
includes delivery. 

312. A holder in due course, or bona fide. — A person is 
said to be a holder in due course, or a lona fide holder, of 
paper, when it has been negotiated to him, before it is due, 
for value and without notice on his part of any defect in the 
title. These three elements we shall explain with some ful- 
ness presently. Meanwhile let us call attention to the fact 
that a finder or a thief may give a perfect title by negotia- 
tion. This he may do when the paper which is lost or stolen 
is transferable by delivery — that is, when it is payable to 
bearer or is indorsed in blank. If he could not do this, 
negotiable paper would be robbed of one of its chief charac- 
teristics — its similarity to money; and all know that a 
thief can give a perfect title to money which he has stolen. 
Otherwise it could not perform its functions as currency. 
It follows from the foregoing doctrine that one ought not 
to send by mail, or by a messenger in whom he has not per- 
fect confidence, or leave in a place where it may be stolen, 
any negotiable paper payable to bearer or indorsed in blank. 

313. Transfer after due. — While negotiable paper, trans- 
ferred after it is due, may be sued upon in the name of the 
transferee, the latter gets no better title than his transferor 
had. In other words, overdue paper is negotiable in a lim- 
ited sense only. This should be borne in mind, however; if 
the transferor were a holder in due course — that is, if it 



NEGOTIABLE PAPER 227 

had been negotiated to him before due, for value and with- 
out notice of anything wrong in it — his transferee, even 
after the paper is due, will get all the rights which he pos- 
sessed. 

The reason why the law merchant does not treat a person 
who comes into the possession of negotiable paper after it 
is due, as a holder in due course, is, that by the usage of 
merchants such paper is paid at maturity in the ordinary 
course of business, unless the acceptor or maker has some 
defense to it. His refusal or failure, therefore, to pay the 
paper and take it out of circulation raises the presump- 
tion that there is something wrong about it. This reason 
may be stated in another way : By the usage of merchants, 
negotiable paper is intended to take the place of money — 
to serve as a paper currency — only until it, is due. At 
maturity it is to be paid and retired. 

314. Paper payable on demand. — When paper is payable 
at a fixed date, or at a certain time after date or sight, the 
day of its maturity is easily determined. This we dealt 
with on a preceding page. Paper payable on demand (which 
includes paper expressed to be payable on demand, or at 
sight, or on presentation, as well as that in which no time 
of payment is expressed) is due for certain purposes the 
moment it is issued. For example, the holder may sue on 
it at once, and hence the statute of limitations begins to run 
at once. But it is not overdue until the expiration of a 
reasonable time after its issue. What is a reasonable time 
will vary with the circumstances of each case, but ordi- 
narily it does not extend beyond a few weeks, and at times 
not beyond a few days. Until the expiration of a reason- 
able time from its issue, it may be negotiated so as to give 
the transferee all the rights of a holder in due course. Still 
again, if such paper does not contain an express promise 
to pay interest, interest will not begin to run until a demand 
is made. But it is generally held that the commencement 



228 ESSENTIALS OF BUSINESS LAW 

of a suit on the paper is equal to a formal demand, and 
sets interest running thereon. 

315. For value. — Negotiable paper was devised by mer- 
chants, as we have seen, to take the place of money. It 
was given for value received, and was transferred for value. 
A man who did not pay value for it did not take it in the 
ordinary course of mercantile business; he did not beeomxe 
a holder in due course. Hence he was not entitled to the 
protection which the usage of merchants gave to the one 
who had paid value for the bill. 

It is not necessary that one should pay the full face 
value of the paper in order to become its holder in due 
course. It is enough that he gives any valuable con-idera- 
tion, provided he takes it before due and without notice. 
But the amount that he gives for the paper always has a 
bearing on the question, Did he take it without notice? 
If he paid full value, that fact indicates that he had no 
notice of any defect in his transferor's title; for a person 
is not apt to pay the full value for paper to which he knows 
or even suspects that the maker or acceptor has a good 
defense. On the other hand, if he paid but little for 
the paper, that fact in connection with others might con- 
vince a court or jury that he suspected the title of his 
transferor. 

316. An old debt as value. — Whether a person who takes 
negotiable paper in payment of an old debt, or as collateral 
security for its payment, is a holder in due course, is a ques- 
tion on which the courts of this country are hopelessly at 
variance. Many of them hold the view, which has long pre- 
vailed in England and in the Federal courts, that he is. 
This view has been embodied in the negotiable instruments 
law, a statute which has been enacted in a number of our 
States, for the purpose of codifying and rendering uniform 
the rules of law relating to negotiable instruments. The 
courts of other States declare that such a person is not a 



NEGOTIABLE PAPER 229 

holder in due course, and that his title is no better than that 
of his transferor. 

317. Taking without notice. — Upon this topic the courts 
are substantially of one mind. If paper has been negotiated 
to one before due and for value, he is deemed a holder in 
due course, unless he is shown to have had knowledge of 
something wrong in the paper, or to have known such facts 
that taking it without further inquiry amounted to bad 
faith. It is not enough that he acted carelessly or even 
stupidly. He must have acted in bad faith. To illustrate : 
A number of negotiable instruments payable to bearer were 
stolen from X. He gave notice of the fact at once to a 
great many bankers, and ordered payment of these instru- 
ments stopped by the makers. Some months later a person 
sold one of these instruments to Y for full value. There- 
after he presented it for payment when it fell due, and the 
maker at X's request refused to pay. Y sued the maker, 
who proved that one of the notices sent out by X had been 
received by Y and was in his office when he bought the 
paper. Y replied that he had forgotten all about the notice, 
and bought the paper without any thought or suspicion that 
the seller's title was defective. The jury found that Y 
acted honestly in the matter, and accordingly he recovered. 

318. Holder in due course takes title free from personal 
defenses. — Having seen what constitutes a holder in due 
course, let us now consider the nature of his title. We have 
said that he may take a better title than his transferor had; 
that he may enforce the paper free from certain defenses 
which might have been set up successfully against the trans- 
feror. These defenses are called equitable, or personal. 
Let us illustrate these terms by a concrete case. A sells a 
horse to B for two hundred dollars, having induced B to 
purchase by false representations that the horse is sound 
and safe. B makes and delivers his promissory note for the 
price'to A's order, payable three months after date. When 



23.0 ESSENTIALS OF BUSINESS LAW 

it is due he refuses to pay it. A sues him^ and B sets up 
as a defense that A cheated him; that the horse was so 
unsound and vicious as to be good for nothing, and that it 
had been tendered back to A, who refused to receive it. 
That is a good defense. It is inequitable that A should 
enforce the payment of the note. Hence the defense is 
sometimes spoken of as an equitable one. Had A negotiated 
the note to C before due, for value and withqut notice, the 
latter could have enforced it free from that defense — that 
is, the defense is personal against A, or one who has no bet- 
ter title than A, but it is not available against a holder in 
due course. 

319. Real or absolute defenses. — These are available 
against any holder of the paper. They are called " rea^ 
because they attach to the res (the thing) — i. e., the paper 
itself. They are called absolute defenses in order to con- 
trast them with the equitable defenses, referred to in the last 
paragraph — i. e., defenses based upon the unfairness or in- 
justice of the plaintiff's attempt to enforce the paper. 
Legal incapacity of a person to make a contract is a real 
or absolute defense. An infant maker of a note or acceptor 
of- a bill can plead his legal incapacity and avoid the instru- 
ment even against a holder in due course. Such a holder 
must look for redress from his indorser. The indorser 
would be liable to the holder whether he indorsed with 
knowledge of the maker's or acceptor's infancy or not, for 
the indorser, it will be remembered, impliedly engages that 
the paper is valid. 

Another example of a real or absolute defense is af- 
forded by the alteration of negotiable paper. A note is 
made for one hundred dollars, and is changed to one for 
a thousand dollars. Though the alteration may have been 
made so skilfully as to render detection by the holder impos- 
sible, it is an absolute bar to his recovery against the maker, 
OJ any one who became a party prior to the alteration. His 



KEGOTIABLE PAPER 231 

only claim is against his transferor and those who indorsed, 
and thus guaranteed the validity of the paper after its 
alteration. 

320. Fraud in securing the signature. — This, too, may 
be a real defense. For example, A contracted with B to 
sell grain-seeders, and asked B to write his signature on a 
piece of paper to be sent to the manufacturers of the seed- 
ers, so that they might know his signature when he ordered 
machines. Later A wrote a promissory note for a thousand 
dollars over B's signature, and negotiated it for full value 
to C, who took it before due and without notice of A's fraud. 
B refused to pay the note. C sued him and was beaten. 
B's defense, that he never signed the note, was available 
against any holder. 

At times persons are tricked into signing papers which 
are misread or misdescribed to them. X is asked to sign a 
contract of agency for the sale of some article ; or a contract 
of guarantee that Y will pay for certain property if it is 
sold to him ; or to sign a paper as a witness to Y's signature. 
Trusting to the statement of the nature of the writing, 
he does not examine it before signing. It turns out that 
the paper thus signed is a bill of exchange or a promissory 
note. Of course he has a good equitable or personal de- 
fense against Y. Whether he has a real or absolute defense 
against a holder in due course depends upon whether he 
acted negligently in signing the paper. If his conduct was 
not negligent his defense is absolute. Otherwise the holder 
in due course will recover. The distinction between the two 
classes of cases mentioned in this paragraph is this. In the 
first the defendant does not sign any paper. In the second 
he knows he is signing something. It is his duty, therefore, 
to use reasonable diligence to learn what the paper is. 



CHAPTEE IX 

pabtnership-joixt-stock: coz^ipaxies— corporations 

PART I.-COMAIOX LAW PAETNEPSHIPS 

§ 1. The Xatuee or Paeixeeships 

321. Wliat is a partnership? — Judges and writers upon 
law have found no little dimculty in defining a partnership. 
In England and in some of our States it has been denned 
by statute. The English partnership act of 1890 declares 
that "'*' partnership is the relation which subsists between 
persons carrying on a business in common with a view of 
profit/*' According to the ciyil code of California, •' part- 
nership is the association of two or more persons for the 
purpose of carrying on business together, and dividing its 
profits between them.'' In Xew York, the Legislature has 
declared that "a partnership, as between the members 
thereof, is an association not incorporated, of two or more 
persons who have agreed to combine their labor, property, 
and skill, or some of them, for the purpose of engaging in 
any lawful trade or business, and sharing the profits and 
losses as such between them.'"" 

If we examine these definitions carefuLy we shall dis- 
coTer that they concur in requiring for a partnership (1) 
a voluntary association of two or more individuals, (2) 
in carrAung on a business owned by them in common, and 
(3) conducted for profit. 

322. The a^eement of parties is essential. — A nartner- 
ship is a voluntary association of individuals. Xo one is 

232 



PARTKERSriiPS AND CORPORATIONS 233 

forced into the relation. One can not be made a partner 
without his consent. True^ partnerships are often entered 
into without any formal articles of agreement, although it 
is always wiser to have the agreement put into writing; but 
there can never be a partnership without a contract there- 
for between the partners. We shall discover the reason for 
this rule when we come to discuss the powers of a partner, 
and learn that he may sell firm property and may contract 
firm debts without the actual consent of his copartner. A 
partner is so at the mercy of his copartners that the law 
secures to him the right to select them; to decide for him- 
self who shall be and who shall not be his associates in this 
relation. 

It is not to be understood, however, that a person may 
not make himself liable to third persons as a partner, al- 
though he is not a partner in fact. For example, A says to 
C : " I am in partnership with B. Any goods which he 
orders from you will b^ ordered for the firm." There is 
no such partnership. C receives an order from B and 
fills it. He can recover from A as though he was in fact 
a partner. Having induced C to part with his goods, by 
representing that there was a partnership between himself 
and B, he is estopped from showing there is no partnership. 
The same rule applies wherever a person holds himself out 
or permits himself to be held out as a partner. " Holding 
out '' is often practised by having one's name on the firm 
sign, or on the firm letter-heads, or in the firm circulars or 
advertisements, but these are not the only forms which it 
takes. Any representation which a man makes or suffers 
to be made for him, either by words or by conduct, that he 
is a partner in a particular business, amounts to a " hold- 
ing out " by him. 

323. Specific intent to form a partnership is not neces- 
sary. — While a person does not become a partner without 
his consent to a contract of partnership, he may enter into 



234 ESSENTIALS OF BUSINESS LAW 

the relation without intending to do so. He may think, and 
his lawyer may advise him, that a contract which he is about 
to make will not create a partnership. They may be mis- 
taken as to the legal nature of the contract. It may re- 
sult, although they think it will not, in making him and 
others owners of a business carried on by them in common 
with, a view to profit. If it does he is a partner although 
he did not intend to become one. A person who becomes a 
stockholder in a cooperative grocery-store is a partner 
with the other stockholders, if goods are to be sold to out- 
siders at a profit, whether he thinks this is a partnership 
or not. If the store were opened, however, simply for the 
benefit of its members, its purpose being the purchase of 
goods and their distribution among the members at whole- 
sale prices, the stockholders would not be partners. Nor 
would the result be different if they thought they were 
organizing a partnership and called it by that name. In 
short, it is not the secret intent of the parties nor their 
language, but the substance of their contract, which deter- 
mines whether a partnership has been formed or not. 

324. Carrying" on business together, (a) It must be 
lawfuL — If the reader will refer to the first paragraph of 
this chapter he will notice that in only one of the definitions 
is the express statement made that the business must be 
lawful. Such is the rule, however, in every jurisdiction. 
Nearly two hundred years ago a highway robber had the 
rashness to bring an action in England against his copart- 
Qers, who had refused to divide the spoils of their joint 
labors, amounting, as he claimed, to more than two thou- 
sand pounds. It is almost useless to say that the action was 
dismissed, and the plaintiff's lawyers were heavily fined for 
their contempt of court in bringing the suit. The plaintiff 
seems to have gone scot-free for the time, but we are as- 
sured that, five years later, he was hanged for some other 
offense. Various attempts have been made in this country 



PARTNERSHIPS AND CORPORATIONS 235 

by persons engaged in an illegal business, such as carry- 
ing on a gambling-house^ to compel their copartners to 
divide the illegal gains, but always without success. The 
courts refuse to protect a gambler, or other criminal law- 
breaker, against the cheats of his copartners. 

325. (h) Meaning of business. — Three hundred years 
ago only those who were engaged in merchandising — in 
trading as merchants — were treated as partners. In other 
words, mercantile business only was carried on by part- 
nerships. A firm^ or partnership of farmers, or of real- 
estate dealers was never heard of. At present, however, 
the term " business " in partnership law includes every 
trade, occupation, or profession. Accordingly, we have 
partnerships of mechanics, of farmers, of real-estate deal- 
ers, of insurance agents, of theatrical managers, of lawyers, 
of doctors, and many others. Still, the old, narrow concep- 
tion of " business " lingers on in some lines of work, such 
as farming on shares. A lets his farm, with its stock and 
implements, to B, who agrees to cultivate it for a year on 
shares — that is, to receive a share of the profits of the 
farm, the remainder to go to A. This is not a partnership, 
but a lease of the farm, A receiving his share of the profits 
as rent, and B his share as wages. 

Again, a business means something more than doing a 
particular piece of work. Two carpenters agree to make 
certain repairs for a certain sum upon the house of A, 
who furnishes all the material; or two lawyers agree to try 
a lawsuit for B for a stipulated sum; here is no indication 
that the carpenters or the lawyers have entered into a part- 
nership. They are not carrying on a business, but are doing 
a single, isolated piece of work. 

326, (c) A common business. — Not only must persons 
be eng^aged in carrying on business in order that they be 
partners, but they must own that business in common. 
Hence, a pooling arrangement is not a partnership. Com- 



236 ESSENTIALS OP BUSINESS LAW 

mon carriers often agree to pool the receipts of their busi- 
ness between points where they are competitors^ as between 
New York and Chicago, and divide the sum total in certain 
proportions. Each carrier controls his own business as 
before the arrangement was made — has his own means of 
conveyance, his own servants, and pays his own expenses, 
and collects for his services. At the end of the year the 
sums received by the different carriers are added together, 
and the share of each in that aggregate under their agree- 
ment is determined. If one has collected more than his 
share the surplus must be handed over by him to the others. 
If he has collected less he is entitled to the deficit from the 
others. But there is no partnership, and each carrier is 
liable for his own debts and not for those of the other mem- 
bers of the pool. 

327. (d) Sharing^ the profits of a business. — A hundred 
years ago it was understood to be the law, both in England 
and in this country, that if one person was to receive from 
the owner of a business a share of its profits, for money 
loaned or for property leased or sold, or services rendered 
to the owner in such business, they were partners as to third 
persons. But that view has been discarded by the English 
courts, and by nearly all of the courts in this country. Un- 
less the person loaning the money or supplying the prop- 
erty, or rendering the services is to become one of the 
proprietors of the business, he will not be a partner, for he 
will not be carrying on the business in common with the 
other. 

328. Business must be carried on for profit. — The insti- 
tution of partnership was devised by merchants, who car- 
ried on business for gain. They did not combine their skill 
and capital for charitable or benevolent purposes, but for 
those of trade. Money profit is still the aim and end of 
partnership. Persons who form associations for any other 
purpose are not partners. A musical society, an athletic 



PARTNERSHIPS AND CORPORATIONS 237 

slub, a political committee, a masonic or other lodge, a re- 
ligious association, a social-reform organization, or any 
similar body of persons is not a partnership. It may own 
property, it may have a treasury, it may charge admission 
fees to games or entertainments, but it is not a partnership, 
for the simple reason that it is not a business association 
existing for the sake of making money. Accordingly, its 
members are not agents for the association or for the other 
members in making contracts or incurring obligations. A 
person who sells goods to such a body must look for his pay 
to the members who ordered them and those who actually 
authorized or have since ratified the purchase. 

§ 2. Partnership Property 

329. It starts with the firm's capital. — One of the chief 
reasons for forming a partnership is the accumulation of 
a fund larger than any one partner is able or willing to 
embark in the business. This fund is known as the firm's 
capital. It may consist of money, or of goods, or of land. 
The partners may contribute equally or unequally to it. 
One may furnish all the capital, while the other or others 
contribute skill and experience, which are thought to be 
quite as necessary to the success of the enterprise as money. 
At times a partnership has very little money capital, as in 
the case of a firm of insurance agents, or of physicians or 
of young lawyers. In every case, however, as soon as the 
capital has been contributed and the partnership has been 
organized, that capital ceases to be the separate property 
of the partners, and becomes the property of the firm. 
With it the firm carries on its business and acquires other 
property. 

330. The firm as a person. — By the custom of merchants 
a partnership is treated very much as though it were a 
corporation — an artificial person. Not only is it the owner 



238 ESSENTIALS OF BUSINESS LAW 

of the firm property, but it may make contracts with the 
persons who compose it. In partnership bookkeeping the 
firm appears as a debtor to its different members for its 
capital, as well as for any money which they may lend it. 
On the other hand, it appears as creditor of each partner 
for the amounts which he draws out of the business. One 
partner often gives promissory notes to the firm for money 
borrowed from it, and receives its promissory notes payable 
to his order for money which he has loaned to it. In all 
such and many other transactions, mercantile custom recog- 
nizes the personality of the firm. But this custom has not 
become a part of the common law. While for certain pur- 
poses it treats partnership property as though it were 
owned by the firm as a person, it makes a sharp distinction 
between a partnership and a corporation. The latter is an 
artificial person, but not so the former at common law. 

331. Partnership real estate. — This distinction comes 
out very clearly in the case of lands. Suppose a corpora- 
tion is duly chartered under the name of John Smith & 
Sons. A deed of land to the corporation in that name 
passes a perfect title to it, and it can convey the land in 
that name to another. But if John Smith & Sons is the 
firm name of a partnership composed of John Smith, Jacob 
Smith, and Nelson Smith, and certain land is bought with 
firm funds and for firm use, the deed should name the 
three men as grantees. If the land is sold by the firm their 
individual names should be used as those of the grantors. 
This is because the common law refuses to treat a partner- 
ship as an artificial person. 

332. Firm property after the death of a partner. — We 
have said that the common law treats firm property for 
certain purposes as though it were owned by the firm, and 
not by the individuals composing it. This it does upon the 
death of a partner. Take a firm composed of A and B. A 
dies. The common law has so far adopted the custom of 



PARTNERSHIPS AND CORPORATIONS 239 

merchants as to treat the firm title as continuing after A's 
death, but controlled entirely by B. He can sell the prop- 
erty, convert it into cash, pay the firm's debts, and divide 
the balance between A's personal representatives and him- 
self. If he does not do this promptly, A's representatives 
can force him to do it, or can have a receiver of the firm's 
property appointed to do it. 

333. Firm creditors and separate creditors. — The com- 
mon law also treats firm property as owned by the partner- 
ship, and not by the individual partners, when a contest oc- 
curs between firm creditors and the creditors of a partner. 
A and B are partners in a manufacturing business. They 
are indebted to X for coal for their factory. A is indebted 
to Y for coal for his house. Y gets a judgment against A 
for the debt, and levies his execution on firm property. 
The next day X gets a judgment against A and B for the 
firm coal, and levies his execution also on the firm property. 
When the property is sold it brings only enough to pay 
X's judgment. Y will be entitled to nothing, for his execu- 
tion was not a lien on the firm title to the property, as was 
that of X, but only on A's individual interest in that prop- 
erty, which turned out to be worth nothing. 

334. A partner's share or interest in firm property.— 
We have just spoken of a partner's individual interest in 
firm property. Perhaps the nature of this interest ought 
to be explained. This can best be done by comparing it with 
the interest which a person has in property which he' owns 
in common with another. Suppose A and B buy a horse, 
each paying one-half the price. They are common owners 
of the horse, each one owning a one-half interest. Each 
may sell his interest to a third party, or that interest may 
be levied on and sold by a judgment creditor of either. But 
neither one can sell the horse without actual authority from 
the other. 

But suppose that A and B are equal partners, and the 



240 ESSENTIALS OF BUSINESS LAW 

partnership property includes a horse. Neither partner^ as 
an individual, owns a half interest in the animal or in any 
other article of firm property. All that he owns is a right 
to have the firm property sold, to have the proceeds applied 
to paying the debts of the firm, and then, and not until 
then, to have his proportionate share of the balance. Ac- 
cordingly, his interest in the horse, referred to above, may 
be worth something or it may be worth nothing, but in any 
event it is not that of an owner in common of the animal. 

§ 3. The Powers of Partners 

335. A majority rules. — Unless the partnership agree- 
ment contains a provision to the contrary, any question 
arising as to ordinary matters connected with the business 
is to be decided by the majority. Even the majority, how- 
ever, must act in good faith in determining such questions, 
and their action must relate to the ordinary business of the 
firm. If a partnership is formed to carry on a grocery-store, 
the majority can not add to this business that of selling 
spirituous liquors. It can decide how an agreed business 
shall be run, but it can not change the nature of the busi- 
ness. 

If the firm has but two members, a deadlock may easily 
occur. In such partnerships the contract ought to provide 
that, in case of disagreement, the opinion of a particular 
partner shall prevail. There are certain acts, however, which 
one of two partners can not prevent his copartner from 
doing. He can not prevent his collection of debts due the 
firm, nor his payment of debts which it owes, nor his per- 
formance of firm contracts, nor, in most jurisdictions, his 
sale of firm property in the ordinary course of business. 
But, as a rule, he may prevent the formation of new con- 
tracts, and may even break up the partnership, although 
such conduct may render him liable to his copartner for 
damages. 



Ji^ARTNERSHIPS AND CORPORATIONS 241 

336. The agency of a partner. — It is here that we find 
one of the most striking characteristics of partnership. 
Each partner is an agent of the firm and of his copartner 
for the purposes of the partnership business. Any act done 
by him, therefore, in carrying on in the usual way any 
business transaction in the name of the firm, is binding on 
the firm and on his copartners, unless the person with whom 
he deals knows that he has in fact no authority to bind them. 
Well may Lord Kenyon have said : " It is an imprudent 
thing for a man to enter into partnership with any person 
unless he has the most implicit confidence in his integrity. 
One partner may pledge the credit of the other to any 
amount." 

It is this agency of each partner that makes it impor- 
tant to determine whether a particular association is a 
partnership or not. For example : A member of an associa- 
tion orders goods from B which it is accustomed to buy 
and use. If it is a partnership B can hold every member 
liable for the price. If it is not, he can hold only those 
members who ordered the goods, or who assented thereto, 
or who have ratified the purchase. Again, A and B own a 
number of horses. A orders hay and grain for their use 
from C. If B is a partner with A in their ownership, C 
has a valid claim against him as well as against A. But 
if 'he is not, if he and A own them in common, C has no 
claim against B unless he can show that B actually author- 
ized A to order the hay and grain, or has ratified the pur- 
chase. 

337. Implied authority of a partner. — It is plain from 
what was said in the last paragraph that the extent of 
a partner's agency depends upon the nature of the firm's 
business. If the partnership is one of farmers you must 
inquire how such a business is usually carried on before you 
can determine just what implied authority a partner has 
to act for and bind the firm. The same inquiry must be 



242 ESSENTIALS OF BUSINESS LAW 

made if the partnership is one of lawyers^ or physicians, or 
bankers, or merchants, or manufacturers. He has implied 
authority to do whatever, by the general usage of that par- 
ticular line of business, is ordinarily done by those who 
carry it on. 

If the partnership is a trading or commercial one — 
that is, if it is engaged in buying or selling on credit — he 
has implied authority to hire servants, to buy and sell 
goods, to pay and collect debts, to borrow money, and to 
issue negotiable paper in the firm's name — a very exten- 
sive authority, and one which can be and has been grossly 
abused, to the financial ruin of innocent copartners. For a 
partner may buy goods or borrow money, pretending they 
are for the firm, then use them for his own purposes, and 
run away, leaving his copartners to pay for the goods or 
repay the money. 

338. Liability for the misconduct of a partner. — The 
doctrine of a partners agency, which we have been consid- 
ering, enables him not only to subject his copartners to con- 
tract liabilities for the wages of servants, for the price of 
goods, or for the payment of negotiable paper, to which 
they never assented, and from which they never had any 
benefit, but it makes it possible for him to subject them to 
liabilities in tort. One partner goes out to collect a debt 
due the firm. He seizes and sells certain property which 
he believed was owned by the debtor, but which in fact be- 
longed to a third party. Such owner has a perfect action 
in tort against all the partners for the conversion — the sale 
for their benefit — of this property. In short, the same rule 
applies here which was laid down in the chapter on Agency, 
that the principal (here the firm as well as each copartner) 
is answerable for the wrongful acts of his agent, done within 
the scope of his agency. 

339. Good faith toward copartners. — Because of this 
great power which each partner has over the fortunes of hi^ 



PARTNERSHIP AND CORPORATIONS 243 

associates, the law is very stringent in holding him to the 
utmost good faith in all his conduct toward them. If he 
buys goods for the firm at a bargain he must give them 
the full benefit of the bargain. He is bound to devote him- 
self honestly and exclusively to the firm's business, unless 
the partnership contract exempts him from such duty, and 
he must not carry on business in competition with that of 
his firm. 

§ 4. The Dissolution of Partnership 

340. By operation of law. — A partnership is dissolved, 
without any agreement or act of the parties, when the law 
prohibits its contiiluance. War breaks out between the 
United States and Spain. This dissolves a partnership be- 
tween citizens of the two nations living in their respective 
countries, because commercial intercourse between the two 
states has become unlawful. At common law the marriage 
of a female partner dissolved a business partnership of 
which she was a member. Her interest in the firm passed 
to her husband, and " her legal personality for many pur- 
poses became merged in his." At present, both in England 
and in many of our States, married women have been re- 
lieved from this rule, and may be members of business 
partnerships as though they vrere unmarried. 

A partnership is dissolved by operation of law, also, 
upon the natural death of a partner, or upon his bankruptcy 
(which event, as we have seen, is regarded as his financial 
death) . Neither the personal representative of the deceased 
partner nor the assignee of the bankrupt partner has any 
right to enter the firm. He may be a person whom the sur- 
viving partners would not choose as a business associate, 
and they have the right of choice, as we have already 
pointed out. And yet, whatever interest the deceased or 
bankrupt partner had in the firm vests in and belongs to his 
personal representative or assignee. It is clear, therefore, 



244 ESSENTIALS OF BUSINESS LAW 

that the death or bankr-aptcy of a partner miist dissolve the 
firm at once. 

341. By act of the parties. — This is the common method 
of dissolving a partnership. The parties may agree in ad- 
vance that it shall terminate at a certain time. When the 
time arrives the firm dissolves without any further act of 
the parties. If the term of the partnership is not agreed 
upon, either party may end it at his pleasure, and in this 
country he may so end it even when the partnership is for 
a fi:Ked period. Such conduct, however, amounts to a breach 
of his contract, and may subject him to the payment of 
damages therefor; but the courts of this country do not 
believe in forcing a man to remain in a partnership which 
is distasteful to him, or which he fears will be unprof- 
itable. 

342. By judicial action. — A partnership may also be dis- 
solved by a court. If the business is carried on at a loss, and 
the partner wishes to have the firm dissolved before the end 
of its term, without running the risk of a suit for damages 
brought by his copartner, he institutes an action in court 
for its dissolution. Upon showing that the business is a 
losing one he is entitled to a dissolution. So he is if his 
copartner has been guilty of serious misconduct, or if he 
has become insane, or is otherwise permanently incapaci- 
tated for business. 

343. Upon dissolution, firm property is to be distributed 
among" the partners. — As soon as a firm is dissolved its 
business is to be closed up, its property is to be converted 
into cash, its debts paid, and any balance is to be divided 
among the partners. It follows from this that the agency 
of each partner for the firm ceases upon the firm's dissolu- 
tion, except as to matters which are incidental to closing up 
its affairs. For example, a partner is still agent for the 
firm in selling property; in completinsf contracts, which 
Were made before its dissolution, but which were unfinished; 



PARTNERSHIP AND CORPORATIONS 245 

in collecting and paying debts. But he is not an agent for 
making new contracts. 

In England any real estate owned by tke firm is to be 
treated as personal property in settling np its business. 
It is to be converted into cash, as though it were a stock of 
goods. But, in this country, it is treated as personal prop- 
erty only so far as its proceeds are needed to pay firm debts. 
Beyond that point it preserves its character as real property. 
It descends to the heirs of partners, and their wives have 
dower interests in it. The nature and importance of this 
distinction will be made clear in the next chapter, on 
Property. 

344. Order of distribution. — The property of a partner- 
ship, after it has been turned into money, is distributable in 
the following order: (1) Debts and liabilities, owing to 
persons who are not partners, are to be paid. If there is 
not firm property enough to pay these in full, each partner 
is liable for every dollar of them. (2) When all outside 
debts have been paid the next claims in order are those for 
money loaned to the firm by the several partners. If there 
is not enough to pay these claims in full they are to share 
ratably. Suppose partner A has loaned ten thousand dol- 
lars and partner B has loaned five thousand dollars, and 
there is a balance of seventy-five hundred dollars after 
paying outside debts. A and B will each receive fifty 
cents on a dollar of his claim. (3) The next claims to be 
paid are those for capital, and here again the partners 
share the balance in proportion to their contribution to 
the capital of the firm. If one contributed all the capital, 
he will receive all the balance. (4) If anything remains 
after paying the three preceding classes of claims it will be 
divided in the proportion in which the profits of the busi- 
ness were to be shared. 

345. The proportion in which profits and losses are 
sharable. — This is ordinarily fixed by the terms of the 



246 ESSENTIALS OF BUSINESS LAW 

partnership agreement. If^ however, it is not, the law pre- 
sumes that profits and losses are to be shared equally, how- 
ever unequal may be their contributions of capital by the 
different members. Accordingly, if A and B form a part- 
nership with a capital of twenty thousand dollars, all of 
which is contributed by A, and makes a profit of four thou- 
sand dollars, one-half of this belongs to B unless they have 
agreed upon some other proportion. On the other hand, 
if they carry on business at a loss, instead of at a profit, 
B must make good to A one-half of such loss. If the busi- 
ness has been so disastrous as to sweep away the whole 
capital and also to leave" debts to outsiders, B will be bound 
to pay one-half of those debts, and, besides, to pay A one- 
half of the twenty thousand dollars of capital. When we 
say that B is bound to pay one-half of the debts due to per- 
sons outside the firm, we have reference only to his obliga- 
tion to A. To the firm creditors he is under an obligation 
to pay the whole of their claims. In other words, each 
partner is liable to the extent of his fortune for every debt 
owing by the firm. It is this liability to firm creditors which 
makes partnership so hazardous. 

§ 5. Uniform Partnership Act 

345 (a). Modifies existing law,. — This statute, formu- 
lated by the Commissioners on Uniform State Laws, and 
adopted by several States has modified to some extent the 
rules stated in this chapter. In the main, however, it is 
but a codification of the views approved in the foregoing 
text. For example, it defines a partnership as "an associa- 
tion of two or more persons to carry on as co-owners a 
business for profit." 

345 (b). Partnership real estate. — The statute does not 
convert the firm into a legal person, but it does recognize a 
firm title to partnership property, which is quite distinct 



PAETNERSHIP AND CORPORATIONS 247 

from the title of each partner to his separate property. It 
declares that ^'any estate in real property may be acquired 
in the partnership name/' If so acquired, it "can be con- 
veyed only in the partnership name/' This, it will be ob- 
served, modifies materially in the States, adopting the act, 
the doctrine stated in paragraph 331. Partners are per- 
mitted, however, to take title for the firm in their indi- 
vidual names. If they so take title, a conveyance executed 
by them passes all rights of property therein, 

345 (c). A partner's share in firm property. — The stat- 
ute applies the doctrine set forth in paragraphs 332, 333 
and 334 with much particularity. A partner has no right 
to possess firm property, except for partnership purposes; 
that is, he has no right to apply it on his personal debts, 
and a creditor who receives it for such a purpose cannot 
hold it against the other partners or the firm creditors. A 
partner's interest in firm property is not subject to levy 
under attachment or execution, in a suit against him for 
an individual debt; nor is it "subject to dower, courtesy, or 
allowances to widows, heirs, or next of kin.'^ If an indi- 
vidual creditor of a partner would get hold of the latter's 
interest in firm property, he must apply to the court, in 
which he has obtained a judgment against the partner, for 
an order charging that interest with payment of the judg- 
ment. In these proceedings the rights of the other partner 
and of firm creditors are protected. 

All this follows logically from the rule that "a partner's 
interest in the partnership is his share of the profits and 
surplus, and the same is personal property.'^ 

345 (d). Partner's agency. — While the statute afiirms 
the rule as to a partner's agency, stated in the text, it de- 
clares that "unless authorized by the other partners or 
unless they have abandoned the business, one or more but 
less than all the partners have no authority to assign the 
partnership property in trust for creditors, or dispose of 



248 ESSEKTIALS OF BUSIXESS LAW 

tlie good will of the business, or do any other act which 
would make it impossible to carry on the ordinary business 
of the partnership, or confess a judgment or submit a part- 
nership claim or liability to arbitration or reference." 

345 (e). Partner's liability. — For any tort, or wrongful 
act or omission, of a partner acting in the ordinary course 
of the business of a partnership, such as is referred to in 
paragraph 338, as well as for any breach of trust by him, 
while acting within the scope of his apparent authority, all 
the partners are jointly and severally liable. That is the 
victim of the wrong can sue them all in one action, or he 
can sue each separately. For breaches of contract obliga- 
tions, however, the statute declares them jointly liable; not 
jointly and severally liable. 

345 (f). Partnership affairs after dissolution. — The 
power of a partner to bind the partnership, after dissolu- 
tion, is defined with great particularity in the statute, but 
the general doctrine stated in the text is not modified. The 
statute adopts the English rule as to real property, referred 
to in paragraph 343, and distributes its proceeds as personal 
property. If a partnership is rescinded for fraud practiced 
by one partner upon another, the defrauded party is en- 
titled to recover whatever he paid for admission to the iirm 
and to be indemnified by the partner guilty of the fraud 
against all firm liabilities. 

345 (g). Order of distribution. — The statute requires 
the partnership to indemnify every partner for payments 
made and liabilities incurred in the proper conduct of the 
business or for the preservation of its business or property. 
It gives him interest on all advances beyond capital, and 
interest on capital from the date when repayment should 
have been made. It denies to a partner, except a surviAing 
partner, remuneration for acting in the partnership busi- 
ness. 



PABTNEKSHIP AND CORPOKATIONS 249 

PAET II 
§ 1. Limited Partnership ^ 

346. Borrowed from French law. — Limited partnership 
is a style of business association not known to English com- 
mon law, nor to the law merchant. It was first introduced 
into this country in the year 1822 by the Legislature of New 
York, which copied many of its features from a similar in- 
stitution in French law. The experiment proved so suc- 
cessful that it has been repeated by most of our States and 
Territories. 

347. Its characteristics. — Limited partnership has some 
of the features of general, or common-law partnership, 
which we have been considering, and some characteristics of 
corporations, which we shall describe a little later. It must 
have at least one member who is liable without limit for all 
the partnership debts, and who is the manager of the busi- 
ness. With such general partner or partners, one or more 
special partners are associated, who take no part in the 
conduct of the business, and whose liability for firm debts 
is limited to the sum which each contributes to the firm's 
capital. 

In a few States limited partnership associations are 
authorized by statute, which are almost like corporations. 
They do not have a general partner, and their creditors 
can look only to their capital and assets for payment. 

348. How limited partnerships are formed. — We can not 
describe in detail the manner of organizing these partner- 

^ The Commissioners on Uniform State Laws have prepared a 
Uniform Limited Partnership Act, which has been adopted by 
several States. It modifies the older statutes in many respects. 
It expressly declares that "a limited partner shall not become 
liable as a general partner unless, in addition to the exercise of 
his rights as a limited partner, he takes part in the control of 
the business." The act forms Ch. 280 of Md. laws of 1918. 



250 ESSENTIALS OF BUSINESS LAW 

ships. It is enougli to say tliat the method prescribed by 
statute in the State or Territory where the partnership is 
formed must be carefully followed. If the proper papers 
are executed and are filed in the proper office, if the money 
or property which the special partner professes to con- 
tribute is actually turned over to the firm, and if the busi- 
ness is thereafter conducted in the way provided by the 
statute, the special partner will not be liable for firm debts 
beyond his contribution to the firm's capital. It is this last 
feature of limited partnership which has made it popular. 
Many a man is willing to risk a specific sum in a business 
which he has not the time or energy to manage, who would 
refuse to become a general partner in the business, with the 
indefinite hazard to his entire fortune which such a partner- 
ship would involve. 

If the statutory requirements are not complied with, 
either upon the formation of a limited partnership or in the 
conduct of its business, the special partner will lose the 
statutory exemption from liability, and become liable as a 
general partner. 

PAET III 
§ 1. Joint-Stock Companies 

349. Are partnerships with peculiar features. — A joint- 
stock company is a partnership. Each member is liable 
for all the debts of the concern. But it differs from the 
ordinary partnership in two respects. Every partner is 
not an agent of the company, and the death of a partner 
does not dissolve the firm. 

We have seen that one of the chief objects of the ordi- 
nary partnership is the union of the business skill, experi- 
ence, and abilities of its members. These are considered 
quite as important as the money capital which they bring 
together. The joint-stock company, on the other hand, 



PAETNEESHIP AND COEPOEATIONS 251 

seeks first of all the aggregation of firm capital. In the next 
place, it seeks a form of association which shall have a con- 
tinuous existence — which shall not be broken np by any 
partner's death, or by the sale of his share, or by his re- 
fusal " to play/' Accordingly, when this form of partner- 
ship is organized, it is agreed that the capital shall be 
divided into a certain number of shares, each share being for 
a definite sum of money — ten, twenty-five, fifty, or one hun- 
dred dollars, as the case may be. It is further agreed that 
a partner may dispose of his shares at any time, and that 
the transferee may take his place as a stockholder in the 
firm. It is still further agreed that the management of the 
business shall be confided to a small number of persons, 
to be elected by the stockholders. 

350. Mining" partnerships. — These are organized, as a 
rule, on the joint-stock-company plan. In them, as in every 
other joint-stock association, the only partners who are 
agents for the firm are the managers. Every one dealing 
with them is bound to know that the managing partners 
only have authority to buy and sell, to make contracts, or 
to do other acts on behalf of the firm. 

351. Statutory joint-stock companies. — In many of our 
States the formation of these associations, the choice of 
managers, the names and powers of such officers, as well as 
the manner in which they may sue and be sued, are regu- 
lated by statutes. The tendency of this legislation is to 
make these companies more like corporations, and less like 
partnerships than they are at common law. 



PAET IV 

§ 1. COEPORATIONS 

352. An artificial or legal person. — The ordinary busi- 
ness corporation — the only species of corporation with which 



252 ESSENTIALS OF BUSINESS LAW 

we are now concerned — is organized by natural persons and 
exists for their benefit, but is qnite distinct from them. In 
the words of Cliief-Jnstice Marshall, when deciding the 
famous Dartmouth College case, it is " an artificial being, 
indivisible, intangible, and existing only in contemplation 
of law." As a person it is a citizen of the State which has 
chartered it, and thns imparted to it the breath of life; it 
may take, hold, and transfer property; it may enter into 
contracts; it can commit torts or civil wrongs; it can even 
be gnilty of criminal offenses for which it may be indicted 
and pimished. Still more striking than any of the fore- 
going characteristics is its legal immortality — " Men may 
come and men may go," but it goes " on forever," unless 
its life is limited by charter. 

353. How created. — Blackstone tells us that the im- 
mediate creative act in the organization of corporations in 
England was usually performed by the king alone, in virtue 
of his royal prerogative — that is, the king gave to the cor- 
poration its charter. In this country corporations are tre- 
ated by the legislative and not by the executive branch of 
government. At times they are chartered by special stat- 
utes, but as a rule they are organized under general laws. 

Under these laws three or more persons (the minimum 
number being fixed by statute) who wish to form a corpora- 
tion meet, decide upon the matters which are required by 
statute to be set forth in a certificate of incorporation, and 
have such certificate properly drawn up. They then sign 
and acknowledge it in a proper manner, have its form 
approved by a judicial officer, when such approval is re- 
quired, and record it in the proper office, often that of the 
Secretary of State. This certificate usually describes the 
objects for which the corporation has been formed — for 
carrying on banking, or insurance, for operating a railroad 
or a ferry, or the like. It also states the name under which 
the corporation is to do business, the amount of its capital 



PARTNERSHIP AND CORPORATIONS 253 

stock, how much of this has been paid in, and various other 
matters of fact. As soon as all the statutory requirements 
have been complied with the corporation is in existence, and 
may enter upon the prosecution of its business. In such 
cases, it will be noticed, the charter of the corporation con- 
sists not simply of its certificate, or articles of association, 
as that certificate is sometimes called, but, in addition to 
that, of the provisions of the statute by which the certificate 
was authorized. 

354. Liability of stockholders. — The capital of a busi- 
ness corporation is divided into shares which are transfer- 
able by the shareholder. The following is an example of 
a certificate of such shares of stock: 

Number C 155. Shares 7. 

AMERICAN WINDOW-GLASS COMPANY 

This certifies that James Blank is the owner of seven shares of 
the Common Capital Stock of the American Window-Glass Com- 
pany, a corporation of the State of Pennsylvania, of the par value of 
One Hundred Dollars each. Transferable only on the books of the 
Company, in person or by attorney, on surrender of this certificate. 

Witness the corporate Seal of said Company, and the signatures 
of the President and Treasurer, the third day of July, 1900. 

J. A. Chambers, President. 
[seal] W. G. McCandless, Treasurer. 

Capital, $17,000,000. Preferred Stock, $4,000,000. Common 
Stock, $13,000,000. 

It will be observed that the stock represented by the 
foregoing certificate is common, while other stock of fhe 
corporation is preferred. The difference between the two 
is this: that an agreed rate of interest is to be paid out of 
the corporation earnings on the preferred stock before any 
dividends are payable on the common stock. 

If the corporation has been duly organized and all the 
requirements of law are observed in its management, the 



254 ESSENTIALS OF BUSINESS LAW 

stockholders have no liability for its debts. To be sure the 
money which they paid for their stock may be taken by 
creditors^ for that is owned by the corporation; but in case 
the business proves unsuccessful, that is all the stockholders 
lose. They are under no personal obligation to creditors, 
as partners are. Such, at least, is the general rule. 

355. Transferability of stock. — It will be noticed that 
certificates of stock are not ordinarily negotiable instru- 
ments. They are not made payable to order or to bearer, 
and they provide that the transfer shall not be deemed com- 
plete until it is entered upon the books of the company. 
Still, if the owner indorses them on the back, and delivers 
them to an agent Avith instructions to use them in a par- 
ticular way, the agent will be able to give a perfect title to 
them to one who buys for value and with notice of the 
agent's limited authority. 

At times all the stock of a corporation is owned by its 
officers, but in the case of our great railroad, telegraph, and 
manufacturing corporations, the stock is owned by multi- 
tudes of persons scattered all over the country. It is con- 
stantly changing hands, and a large part of the business of 
the stock exchange in our large cities consists in real or 
fictitious sales of these stocks. 

. 356. The power of stockholders. — AYhile the artificial 
person, the corporation, owns the property and owes the 
debts, its conduct is determined by the stockholders. They 
are the power behind the throne. It is true that they do 
not hold frequent meetings, and that when they do gather 
they do not consider the details of business; but tii«ir will 
is supreme. Ordinarily they choose a board of directors, 
who select a president, a treasurer, and a secretary, and to 
these officials the stockholders commit all the details of 
management. Still, the lines of general policy are, or can 
be, marked out by the stockholders. 

Even the stockholders, however, have no legal power to 



PAETNEESHIP AND COEPOEATIONS 255 

• 
do acts not authorized by the charter of incorporation. Acts 
attempted by them or by officers outside the scope of charter 
authority, are said to be ultra vires — beyond their legal 
power. It is important, therefore, for persons dealing with 
a corporation to know the limits of its charter powers, and 
to see that all contracts with it are such as are clearly 
authorized. If they are unauthorized they are generally not 
enforceable against the corporation, or by it. 

357. Contracts by corporations. — The old rule of the 
common law was that " a corporation being an invisible 
body could not manifest its intention by any personal act 
or oral discourse, and, therefore, could act and speak only 
by its common seal." This rule proved to be very incon- 
venient, and has been eaten away by exceptions until little 
if anything of it remains. In this country a corporation 
makes contracts through its authorized agents, precisely 
as a natural person would, and is called upon to use its 
seal only when a natural person would need to use a seal. 

Whenever a corporation enters into a written contract, 
or makes a conveyance of property, its name should appear 
in the body of the writing, and its name should be signed 
thereto. Following the signature of the corporate nama 
should be the signature of the officer or agent who writes 
that name. 

358. Dissolution of corporations. — A corporation may be 
dissolved in various ways. If it is chartered for a limited 
period, as for fifty years, it will be dissolved by the expira- 
tion of that period. In England Parliament may dissolve 
a corporation at any time, but in this country one of our 
State legislatures can not annul a corporation's charter 
unless it reserved the right to do so when it granted the 
charter. This is because the Federal Constitution provides 
that '^ no State shall . . . pass any . . . law impairing the 
obligation of contracts.'' (Article I, Section 10.) In the 
great case of Dartmouth College against Woodward, the 



256 ESSEN-TIALS OF BUSINESS LAW 

Supreme Court of the LTnited States decided, in 1819, that 
the charter of a private corporation is a contract between 
the State and the corporation, and, tlierefore, within the 
provision of the Constitution quoted above. Since that 
decision, it lias been customary for the States to provide in 
their statutes, tliat corporation charters shall be granted 
subject to the right of the State to modify or annul them 
at pleasure. 

Another method of dissolving a corporation is by a suit 
brought by the State for the forfeiture of the charter, be- 
cause of some flagrant abuse of its franchise by the cor- 
poration. Still another is the voluntary surrender of its 
charter to the State. 

358 (a). Receivers. — When proceedings are instituted 
for the dissolution of a corporation, a receiver is generally 
appointed by the court to take charge of its assets, manage 
its business while its affairs are being wound up, distribute 
the net proceeds, after paying debts, among the stockhold- 
ers, or if the corporation is reorganized turning over the 
property to the new organization. In this way the business 
of a railroad or similar corporation can be carried on until 
the assets can be disposed of advantageously and creditors 
can be kept from sacrificing the property and compelled to 
share rateably in the assets. The appointment of receivers 
and their powers and duties are often regulated by statute. 
As a rule, the debts incurred by a receiver in the proper 
discharge of his duties must be paid before other . claims 
upon the corporation, as these are contracted for the pres- 
ervation of its property and in the interest of all creditors. 

358 (b). Federal corporations. — While most corpora- 
tions, in this country, are chartered by the several states, 
congress has power to charter them for purposes authorized 
by the constitution. K'ational banks are chartered under 
congressional legislation. So are the Union Pacific Eail- 
road, the Nortberii Pacific and others. The American Na- 



PARTNEESHIP AND COEPOEATIONS 257 

tional Association of Eed Cross is a federal corporation. 
(Act of Jan. 5, 1905, Cli. 23, 33 Stat. L. 599.) Authority 
is given to the U. S. Shipping Board to form corporations 
nnder the law of the District of Columbia for the operation 
of merchant vessels (Act of Sept. 7, 1916, Ch. 451, §11; 
39 Stat. L. 731). 

We have said that a corporation is a citizen of the State 
which 'Chartered it. The citizenship of a federal corporation 
is not subject to so simple a test. If it is organized, as in 
the case of Shipping Board corporations, under a congres- 
sional act for the District of Columbia, it is a citizen of 
that District and is as much a foreign corporation in the 
State of New York as is one chartered by New Jersey. On 
the other hand, a national bank, which is chartered under 
an act of Congress as a national legislature, is not a foreigii 
corporation in any State. It is as much a domestic cor- 
poration of the State where it has an office or does business, 
as though created by a law of that State. This follows from 
the doctrine that the United States government is not a 
sovereignty foreign to the States, but is a concurrent, and 
within its jurisdiction, a paramount sovereignty. Its laws 
are the laws of each State. 

358 (c). Uniform Stock Transfer Act.— This legisla- 
tion, prepared by the commissioners on uniform State laws, 
and enacted (1918) in twelve States^ has modified in im- 
portant respects, the law relating to stock certificates. It 
provides that title to a certificate and to the sliares repre- 
sented tliereby can be transferred only by its delivery in- 
dorsed or assigned as prescribed in the act. If so delivered 
by one appearing by the certificate to be the owner, the 
transferee, who takes it for value, in good faith without 
notice of any facts making the transfer wrongful, can hold 
it and the shares it represents, free from the claims of one 

^ In Xew York the Act forms Article 6 of the Personal Prop- 
erty Law, It is Ch, 600 of the Laws of 1913, 



258 ESSENTIALS OF BUSINESS LAW 

from whom it had been obtained by fraud, duress or mis- 
take. In short, the certificate is made fully negotiable, and 
its use as an instrument of commerce is greatly enhanced. 
If it is indorsed in blank, a person to whom it is offered for 
sale or as collateral security for a loan, runs little risk in 
taking it. Hence, the owner of a certificate of stock should 
never indorse it in blank and leave it with anyone who is 
not thoroughly responsible for its loss or misappropriation. 

The act provides that one who delivers a certificate to 
another with the intent to transfer title to him may be 
compelled to indorse it. Again, one who transfers a cer- 
tificate for value warrants that it is genuine; that he has a 
legal right to transfer it and that he has no knowledge of 
any fact that would impair the validity of the certificate. 
Provision is made for enforcing the riglits of creditors of 
the owner against the certificate. The alteration of it does 
not divest title to it, and in case of its loss or destruction a 
new certificate may be issued upon prescribed terms. 

358 (d). Supervision of corporations. — Modern legisla- 
tion subjects these artificial persons to careful supervision, 
with a view to protecting stockholders and the public. They 
are required to file reports periodically giving the facts con- 
nected with their organization, their capital and the con- 
duct of their business, so that the public may form an 
accurate opinion of the value of their stock. The Federal 
Trade Commission has authority to investigate many cor- 
porations and to require reports. (Act Sept. 26, 1914, Ch. 
311.) 



CHAPTEE X 
property-its acquisition and transfer 

§ 1. Nature and Forms of Property 

359. Meaning^ of term. — Property, in its broad, popular 
sense, includes whatever the law permits a person to own — 
that is, to possess, to enjoy and to dispose of, to the exclu- 
sion of every one else. Some things are excluded from pri- 
vate ownership. The air, the sea, the Great Lakes, running 
water, are the chief examples of this class. A person may 
have the right to enjoy them temporarily, but he can not 
acquire an exclusive ownership of them; he can not make 
them his private property. But these are exceptions to the 
general rule. Nearly everything in the material world may 
be owned by individuals. 

360. Eeal and personal property. — Our law divides all 
objects of private ownership into real and personal prop- 
erty, a division which corresponds substantially with that 
of the Eoman law into immovables and movables. The 
terms " real " and " personal " were not selected, however, 
as were the corresponding terms of the Eoman law, as de- 
scriptive of the sort of things included in each class. They 
" were first applied to actions, and were afterward ex- 
tended to property with the meanings which they had ac- 
quired in connection with actions." A real action was one 
brought for the recovery of the res — the thing itself; while 
a personal action had for its object the recovery of dam- 
ages from some person for the breach of a contract or other 

259 



260 ESSEXTIALS OF BUSINESS LAW 

obligation. During the twelfth century the rule was estab- 
lished that the only property for which a real action could 
be brought was property in lands. If the action related to 
any other form of property the defendant might relieve him- 
self from liability by paying damages. From this time 
on the term real property or realty is employed to designate 
property in land, and personal property or personalty to 
designate every other kind of private property. The terms 
are still used in that way, although the reason for their 
original selection disappeared long ago. At present an 
owner can maintain a real action for the recovery of his 
horse which has been wrongfully taken from him as he can 
for his house. 

361. Two forms of realty. — Eeal property assumes two 
forms, corporeal and incorporeal ; or, in other words, owner- 
ship of the land itself, and ownership of the right to use 
the land of another for a particular purpose. Easements 
furnish the chief examples of incorporeal real property 
in this country. A right of way over the land of an- 
other- — that is, a right to drive or walk, to pass and repass 
over it — is an easement in such land. So is a right to lay 
and maintain pipes in the land of another for the purpose 
of conducting gas, water, oil, or electricity across it. 

Corporeal real property or land includes not only the 
soil and buildings thereon, but whatever is beneath the sur- 
face and above it. In the language of ancient authors it 
extends from the center of the earth to the highest heavens. 
It embraces mines, veins of gas or oil and the like below 
the surface, bodies of water on the surface, and the vacant 
space above the surface. If my neighbor shoots a bullet 
or sails a kite or passes a balloon through the air over my 
field he commits trespass precisely as though he drove a 
herd of cattle through that field. True, I would be very 
foolish to sue him for such a trifling interference with my 
right of property. So I would if I sued one who walked 



PROPERTY— ITS ACQUISITION AND TRANSFER 261 

across my pasture or my lawn without my permission. But 
in either case he has violated my right of real property. He 
also violates it if he strings telegraph or telephone wires 
over my lot, or builds a structure or plants a tree so that 
any part of it overhangs my soil. 

362. Two forms of personalty. — Personal property is 
divided into things in possession and things in action, or 
tangible and intangible personalty. Of the first kind are 
goods, animals, and other material objects. Of the latter 
kind are debts and liabilities. The owner of a thing belong- 
ing to the first class has it in his possession and actual en- 
joyment, while the owner of a bill of exchange, or of any 
security for money, or of a contract right or an obligation 
of any sort, has only a right to obtain possession by means 
of a legal action. 

363. Realty may become personalty. — Coal, or rock, or 
oil, or gas, or water in its natural state beneath the sur- 
face is realty. But as soon as it is detached from the earth, 
as a separate thing, it is transformed into personalty. So 
trees and other natural products of the soil are realty until 
they are severed from the land, while after severance they 
are personalty. Some crops are treated by our law as per- 
sonal property for most purposes even before severance. 
Speaking generally, they are crops which are not of spon- 
taneous growth, but result from special culture of the soil, 
and " which return the labor and expense bestowed upon 
them strictly within the year." Corn, wheat, oats, potatoes, 
are examples of this class. Grass is not, for the growth of 
any one year is not due to the labor and seed of that year. 

Even crops which are the result of yearly labor are not 
always treated as personal property. A sale of land upon 
which such crops are growing carries them as a part of the 
land. If the vendor would keep them from passing to the 
vendee he must expressly reserve them by a stipulation that 
they shall not go with the land. 



262 ESSENTIALS OF BUSIJs^ESS LAW 

364. Personalty may become realty. — It is a maxim of 
the common law that " whatever is applied to the soil be- 
longs to the soil." Accordingl}^, when bricks and stones 
and mortar and lumber and nails are worked into a per- 
manent building they are a part of the real estate. It is 
so with gas, steam, or water pipes put into a building, and 
with any other article which is affixed to the realty, with 
a view to its becoming a permanent accession thereto. Such 
an article is known as a fixture. It has not lost its identity, 
but it has changed its legal character. It has ceased to 
be personalty and has become realty. A sale of a house and 
lot carries with it all fixtures, unless they are expressly re- 
served by the vendor. 

It is to be borne in mind, however, that articles which 
the law regards as fixtures, as between the owner of the 
land and his transferee, are not always so regarded as be- 
tween the landlord and tenant. If a tenant puts into a 
rented building machinery, or a furnace, or gas-fixtures, or 
shelving and counters, or simih r things, for his use as ten- 
ant, they do not become a part c f the realty as a rule. For 
the encouragement of trade the law regards them still as 
personalty, and permits the tenant to remove them at any 
time before his lease expires. 

§ 2. Methods of Acquiring Property 

365. By one's own acts, (a) Occupancy. — Property 
may be acquired by one's own acts in one of four ways, the 
first of which is occupancy. This is undoubtedly the most 
ancient method of acquiring ownership either of lands or 
of chattels. In our day, however, it is not a very important 
source of title. Indeed, it is scarcely possible in this coun- 
try to become an owner of land by occupancy alone. Accord- 
ing to our law, whatever land is not owned by natural or 
artificial persons belongs to the State or the nation, and 



PROPERTY— ITS ACQUISITION AND TRANSFER 26 



if one is to become owner of it he must acquire title to it 
through one or the other of those governments. If an 
owner abandons land, or dies without a will and without 
heirs, it reverts to the State. Title to personalty may be 
obtained by occupancy even now. Such is the title of the 
finder of abandoned chattels, or of those which have been 
lost and are not reclaimed. It is also the source of title 
which the hunter and the- fisherman gains to his lawfully 
captured game and fish. 

366. (h) Title by prescription and possession. — This 
differs from title by occupancy in that the latter vests as 
soon as the occupant takes possession, while title by pre- 
scription does not becom.e complete until one has kept pos- 
session for a certain period. This period is generally fixed 
by statute, and a longer period is required in the case of 
land than of personal property. As a rule, title to land 
by prescription, as against the State, is acquired by forty 
years' uninterrupted possession under a claim of owner- 
ship. As against any one but the State it is acquired by 
such possession for twenty years. The legal theory under- 
lying this form of title is that a grant or transfer of the 
land is to be presumed to one who has been allowed to 
retain possession of it as owner for the statutory period. 
Under statutes of limitations persons gain a perfect title to 
personal property by possession under a claim of owner- 
ship for periods varying as a rule from three to six years. 

367. (c) Title by natural increase. — The products of 
one's land, the offspring of one's animals, the milk from 
one's cows, and the wool from one's sheep are examples of 
property acquired by this method. 

368. (d) Title by one's labor. — Intellectual productions 
of every sort furnish examples of acquisition by one's labor. 
It is true, the author of such productions can make his title 
to them secure only by complying with certain statutes. 
If he has writtien a book, or invented a machine, he may 



264 . ESSEXTIALS OF BUSINESS LAW 

keep others from enjoying them by retaining them in his 
exclusive possession. But the moment he makes them pub- 
lic they become common property^, unless he has secured a 
copyright of the one or letters patent for the other. 

In this country letters patent are issued by the United 
States Patent Office^ and secure to the inventor for the 
period of seventeen years " the exclusive right to make, use, 
and vend the invention throughout the United States and 
its territories." The United States statutes provide for the 
copyrighting of almost every sort of literary production — 
of books, maps, charts, dramatic or musical compositions, 
paintings, engravings, and so on. A copyright secures to 
the author the exclusive right to multiply copies of his 
production for a period of twenty-eight years, with a pos- 
sibility of renewal for fourteen years more. Eecent statutes 
in this country and in some European states provide for im 
ternational copyright. Under this legislation, an American 
author can copyright his books in England and an English 
author can copyright his books here. 

369. Property acquired upon another's death, (a) By 
will. — The law permits an owner to transmit his property to 
others upon his death, though it does not give him absolute 
liberty of disposition. In certain cases he is not allowed to 
devise or bequeath to corporations all of his property; and, 
generally, he is prohibited from tying up his property, or 
limiting, beyond a fixed period, the power of the one to 
whom he gives it, to dispose of it as he sees fit. 

The instrument by which a person disposes of his prop- 
erty upon his death is usually called his last will and testa- 
ment. Anciently the term " will " was confined to realty, 
and " testament " to personalty. By the former instru- 
ment the testator was said to " devise '^ his lands, while 
by the latter he was said to '^ bequeath " his personal prop- 
erty or chattels. This distinction is not insisted upon at 
present. 



PROPERTY— ITS ACOUTSTTION AND TRANSFER 265 

370. Who may make a will. — The general rule is that 
any person of sound mind and of full age may dispose of 
his property by will. Formerly married women could not 
make a valid will, but modern legislation in most of our 
States has abolished her legal incapacity, and has enabled 
her to make a will as though she were unmarried. Wills of 
personal property may be made by persons under legal age. 
In many of our States males are authorized to make such 
wills at the age of eighteen, and females at sixteen. 

371. The formalities of a valid will. — These were intro- 
duced into English law by the statute of frauds, which was 
described in the chapter on Contracts. Before that act was 
passed a valid will could be made orally. Now, with an 
exception, presently to be mentioned, it must be in writing, 
and that written expression of the owner's last will must 
be properly executed, published, and attested. The pre- 
scribed execution generally consists in the testator's sub- 
scription of the instrument — that is, in his writing his name 
or making his mark underneath the body of the will. Pub- 
lication consists in the testator's declaration to those who 
are to sign as witnesses, that the instrument executed by him 
is his last will and testament. The attestation, or witness- 
ing, consists in two or more persons signing their names 
at the end of the will at the testator's request. These wit- 
nesses must have seen the testator sign the will, or he must 
have acknowledged to them that the signature was his, and 
they must sign in the testator's presence. 

372. Nuncupative wills. — Unwritten, or as they are 
often called, nuncupative wills, are generally limited to 
sailors and soldiers while in actual service and danger, and 
when they have not the time or opportunity to make a writ- 
ten will. 

373. (h) Upon intestacy. — If an owner dies without 
leaving a will — that is, intestate — the law designates the 
persons to whom it shall go. These differ, according as the 



266 ESSENTIALS OF BUSINESS LAW 

property is real or personal. Eeal property " descends to 
the heirs/' while personal property is " distributed by the 
administrator among the next of kin '' of the deceased. At 
times the " heirs " and the " next of kin " are the same 
persons, but this is not always the case ; and the statutes in 
each State must be examined in order to determine who 
are heirs and who are next of kin, as well as the shares 
which such persons are entitled to in the property of their 
intestate. 

It should be stated that as soon as a person dies without 
a will, his real estate vests in his heirs — they become its 
owners at the very moment of his death. Not so in the case 
of personalty. The title to that does not pass at once and 
directly to the next of kin. An administrator must be ap- 
pointed by the proper officer or court — the surrogate in 
some States, in others the probate court, or the orphans' 
court, or a similar tribunal — who takes title to the person- 
alty, settles the affairs of the intestate, collects debts due 
to him, pays debts owing by him, including the funeral ex- 
penses, and distributes the balance under an order of the 
surrogate or of the proper court among the next of kin. 

374. Acquiring property from a living owner, (a) 
With his express consent. — A person may become the owner 
of property by gift from another. In order that a donee's 
title be perfect, the gift or donation must be absolute or 
complete. If I own the promissory note or check of A, and 
hand it over to B as a gift, his title to it is perfect, and I 
can not recover it. If I hand to B my promissory note or 
check for the same amount as a gift he does not get title 
to the money named in the paper. I have simply promised 
to give him the money, and if I repent of my generosity and 
refuse to keep my promise, or if I die before the promise 
is performed, he takes nothing. Even if I have completed 
the gift my creditors may compel the donee to surrender 
it, if I have not sufficient property without it to pay the 



PROPERTY— ITS ACQUISITION AND TRANSFER 267 

debts I was owing when the gift was made. I have no 
legal right to be generous at the expense of my creditors. 

Other examples of obtaining property by the consent of 
the former owner are afforded by conveyances of land, 
which will be described in the next section, and by sales of 
personalty, which will be dealt with in the next chapter. 

375. (b) With the implied consent of former owner. — 
An example of title acquired in this way is that obtained 
by the husband or the wife in the other's property upon their 
marriage. By the common law the husband took the lion's 
share. Still,' under the theory of that law, he took it with 
her implied consent. He became entitled to the rents and 
profits of her lands during their joint lives, and, if a child 
was born, to the use of such lands during his life. This 
latter right was called. " tenancy by courtesy.'^ He became 
the absolute owner of her personal property in possession, 
and had the right to reduce to possession all her choses or 
things in action. On the other hand, she acquired an in- 
terest in his lands, although an interest much less than his 
interest in hers. 

Statutes have taken from the husband most of his rights 
of ownership in the property of the wife. As a rule, in this 
country, marriage does not give to him any right to take her 
personal property without her actual consent, and she may 
defeat his tenancy by courtesy in her real property by con- 
veyance or by will. 

Her common-law interest in his real estate is still pre- 
served, and in some States has been increased by statute. 
That interest was known as "dower" — a right, upon the 
death of her husband, to the possession and use of the third 
part of all the lands owned by him during their marriage. 
A wife can not be deprived of her dower without her con- 
sent unless she is guilty of gross marital infidelity, or unless 
her husband's title is swept away by an ownership superior 
to his. For example, if a husband buys land subject to a 



268 ESSENTIALS OF BUSIXESS LAW 

mortgage, and that mortgage is foreclosed and the land 
sold to satisfy it, the husband's title is lost and the wife's 
dower is lost too. 

376. Title from living owner without his consent. — The 
chief examples of this class are titles derived imder judg- 
ment and execution against the former owner, and under a 
decree in bankruptcy. When a judgment for a sum of 
money is obtained by A against B, the former is entitled 
to have an execution issued to a sheriff or like officer, direct- 
ing him to seize and sell enough of B's property to satisfy 
the judgment and the sheriff's expenses. As a rule, personal 
property, if there is any, must be taken and sold first ; but 
when this is exhausted, real property may be levied upon 
and sold until the judgment and expenses are paid in full. 

In the chapter on Bankruptcy we saw that when one is 
judicially declared a bankrupt, all his property passes to his 
assignee or trustee, who becomes legal o^vner of it, and 
whose duty it is to convert it into cash in order that he may 
pay the expenses of the bankruptcy proceeding, and dis- 
tribute the balance among the bankrupt's creditors. 

§ 3. Co^TVEYAIsTCE OF EeAL PROPERTY 

377. Real property is transferred by a written convey- 
ance. — By the English statute of frauds, to which frequent 
reference has becK made, a conveyance of an estate or inter- 
est in land (except leases for three years or less) is re- 
quired to be in writing and signed by the party undertaking 
to convey the same. As a general rule this conveyance must 
also be under seal, although such seal in some of our 
States may consist in a mere flourish of the pen, as was 
pointed out in the chapter on Contracts. 

378. Various kinds of deeds, (a) Quit-claim deed. — 
While deeds, or written and sealed conveyances of land, are 
of various kinds^, we shall describe only the two which are 



PROPERTY— ITS ACQUISITION AND TRANSFER 269 

most frequently used — the quit-claim deed and the warranty 
deed. By the former the grantor professes to convey only 
such title as he holds to the land described in the deed. 
The grantee takes the property subject to any defects which 
may exist in the title, and has no right to recover any of 
the price he has paid, though it turns out that his title is 
good for nothing. The following is a short form of the 
quit-claim deed authorized by the statutes of Indiana : 

I, John Smith, of Marion County, Indiana, quit-claim unto James 
Jackson, of Harrison County, Indiana, the following described prem- 
ises [then should follow a full and accurate description of the land] 
for the sum of one thousand dollars. 

In Witness Whereof, I have hereunto set my hand and seal this 
first day of March, 1903. 

John Smith. [seal] 

379. (h) Warranty deed. — By this instrument, the 
grantor not only undertakes to convey title to the premises 
described therein, but to warrant and defend the grantee 
against all lawful claims to the property. According to the 
Indiana statutes, the deed set forth in the last paragraph 
can be converted into a full warranty deed, by substituting 
the words " convey and warrant " for the word quit-claim. 
In most States, however, a warranty deed declares that the 
party of the first part grants, bargains, sells, conveys, and 
confirms unto the party of the second part, and to his heirs 
and assigns forever the described premises ; and the party 
of the first part (the grantor) binds himself, his heirs, 
executors, and administrators to warrant and forever de- 
fend the said premises in the quiet and peaceable posses- 
sion of the party of the second part (the grantee), his heirs 
and assigns, against the said party of the first part, and 
against all and every person and persons whatsoever law- 
fully^ claiming the same. 

380. Mortgages of land. — The owner of land often 
wishes to borrow money and give security therefor on the 



270 ESSEITTIAL3 OF BUSINESS LAW 

property. This he does by giving a mortgage on it. Such 
an instrument is in writing and signed and sealed by the 
mortgagor. It is in form a conveyance of the land to the 
mortgagee, but it contains a provision that it shall be void 
and of no effect if the mortgagor pays the money at the 
time stipulated in the mortgage. Even though the mort- 
gagor fails to pay as agreed, the mortgagee does not thereby 
become the absolute owner of the -mortgaged premises as he 
would under a quit-claim or warranty deed. The mort- 
gagor still has the right to redeem the land by paying the 
money and interest. In order to cut off this right of re- 
demption the mortgagee must foreclose the mortgage and 
sell the land. If upon such sale it brings more than enough 
to pay the mortgage debt and the expenses of foreclosure 
and sale, the surplus must be paid over to the mortga,2;or. 

381. Wives should sign deeds and mortgages. — As a 
wife is entitled to dower in her husband's lands, she must 
join with him in signing and acknowledging a deed or mort- 
gage, in order that he may give a perfect title to the land. 
It is in this way that the wife usually assents to the sur- 
render of her right of dower, although she may so assent 
by a separate instrument, known as a release of dower. 

382. Recording of conveyances of land. — As soon as the 
grantee of real estate obtains a deed or mortgage of it, he 
should have it recorded in the proper office, generally the 
office of the county clerk or of the register of deeds. In 
order to entitle it to record, the conveyance must be ac- 
knowledged by the grantor before a proper officer — a notary 
public, a commissioner of deeds, or the like. As soon as it 
is entered in the office for record it is notice to everybody 
that the grantee or mortgagee named therein has the title 
to, or lien upon, the premises. Until the conveyance is re- 
corded it is possible for the grantor or mortgagor to deed 
or mortgage the land to another party, and thus defeat the 
title or lien of the first grantee or mortgagee. 



PROPEETY— ITS ACQUISITION AND TRANSFER 271 

383, Abstract of title. — Upon the sale of real estate it 
is customary for the vendor to furnish an " abstract of 
title/' or, as it is sometimes called^ a " search/' showing 
the true condition of the title. This is a brief statement 
of the various conveyances of the premises described in the 
deed which have been recorded, and of the judgments or 
other liens upon the premises. It is ordinarily made by the 
county clerk or register of deeds for the county, in which 
the land is situated, or by some expert abstractor or searcher 
of titles. In some parts of the country there are large cor- 
porations whose chief business it is to search titles and 
guarantee their validity. 

383 (a). Short forms of deeds and mortgages. — In the 
Eeal Property Law of New York (L. 1909, Ch. 52), and in 
similar statutes in other States, will be found short forms 
of deeds and mortgages, which may be used with safety. 
The New York law has forms for deeds with Full Cov- 
enants; Deeds of Bargain and Sale, without covenant 
against the grantor; similar deeds with covenant against 
grantor; Quit Claim deeds; Executor's Deed; Eeferee's 
Deed in Foreclosure and in Partition, as well as forms of 
Mortgage; of Lease; of Assignment of these; of release and 
of satisfaction of a mortgage. Standard forms of these 
various instruments, as well as of wills, may be obtained 
from stationers, who sell law blanks. 

§ 4. Land Eegisteation : Torkens System 

383 (b). Its origin. — This system was devised by Eob- 
ert Torrens and used first in Australia under a statute 
which went into effect July 1, 1858. Its author, as a col- 
lector of customs, had become familiar with the registry of 
ships under the Merchants' Shipping Act, and conceived 
the idea of applying the principles of ship registration to 
the registration of land titles. His plan was found to work 



272 ESSE^^TIALS OF BUSrN"ESS LAW 

well in Australia and was adopted in other British colonies. 
With modifications^ it has been adopted in Great Britain 
and in several of our States. 

383 (c). Early attempts at legislation in this country 
were not altogether successful. Some statutes were de- 
clared nnconstitntionalj as in Illinois and Ohio, and others, 
as in New York, were drafted upon erroneous principles 
and did not meet the needs of the people, who were seeking 
for a system which should secure freedom, safety and cheap- 
ness in the transfer of land titles. A second statute in 
Illinois avoided all conflict with the constitution, and has 
proved successful in practice, as has a similar act in. Massa- 
chusetts. 

383 (d). Uniform Land Registration Act — This was 
drafted by the Conference of Commissioners on Uniform 
State Laws and has been adopted in several States. Its 
purposes are stated as follows : " For the certain, cheaper 
and more speedy settlement, registration, transfer and assur- 
ance of titles to land, there is hereby established a system 
of land title registration, having the following purposes in 
detail: (1) To establish courts of land registration. (2) 
To provide for the appointment and duties of registrars of 
title. (3) To regulate proceedings to obtain registration 
of title. (4) To authorize the adjudication of title. (5) 
To prescribe tlie nature of certificates of title. (6) To pro- 
vide for the registration of subsequent dealings with regis- 
tered titles. (7) To regulate sundry proceedings after reg- 
istration of title. (8) To determine the legal effects of 
registration of title. (9) To establish an assurance fund. 
(10) To regulate the fees for registration of title." ^ 

The courts of land registration are to be open, except 
on Sundays and legal holidays. Proceedings are instituted 

^The law forms Ch. 28, L. 1918, in Utah; Cli. 62, L. 1916, in 
Virginia. Its substance is embodied in the New York Keal Prop- 
erty Law by Ch. 572, L. 1918. 



PROPERTY— ITS ACQUISITION AND TRANSFER 273 

by a person or persons claiming to own the land; notice is 
given to all persons named by an official examiner of title 
as having any interest in the land or as being adjoining 
owners or occupants. A hearing is had in conrt and an 
adjudication is made as to the ownership of the land. This 
decree is entered by the registrar and the record constitutes 
the original certificate of title. It is conclusive evidence 
of all matters stated therein and binds the land and quiets 
the title thereto, so that one purchasing it for value and 
in good faith gets a perfect title, which he can hold against 
all claimants. A duplicate certificate is issued to the owner 
and takes the place of the old-fashioned deed as evidence 
of his title. 

383 (e). Assurance fund. — The person applying for 
registration must pay into an assurance fund one-tenth of 
one per cent of the assessed valuation of the property. This 
fund is for the satisfaction of claims by persons who were 
deprived of their interests in the land without notice by the 
adjudication and certificate. Such claims, it is believed, 
will not be frequent, but provision should be made for their 
satisfaction out of a fund, or by the State. 

The fees for registrars, examiners of title and other 
officials are moderate.^ 

383 (f). Subsequent transfers. — No examination of 
title, such as is referred to in paragraph 383, is needed for 
subsequent transfers. The owner of the certificate turns it 
over to the purchaser of the property who surrenders it to 
the registrar for cancellation, and receives a new certificate 
in its place, for a fee of three dollars. As there is no deed, 
with its prolix provisions, to be recorded, there is no fee 
for its record. A mortgage of the property can be regis- 
tered for one dollar, and no other record is necessary. 

^ In New York the estimated cost of ihitial registration (except 
attorneys fee) is put by one of the registrars, at $51 for a $10,009 
property. 



274 ESSENTIALS OF BUSINESS LAW 

383 (g). Construction of the act. — The statute provides 
that it shall be so construed as to effectuate its general pur- 
pose to make uniform the law of those states which enact 
it. Similar statutes have been declared by the courts to be 
remedial and not in derogation of the common law. The 
remedy they aim at is the simplification of land titles, and 
the cheapening of the cost of real estate transfers. Hence, 
say the courts, they are to be construed, not strictly but 
liberally, "so as to advance the remedy and repress the evil." 



CHAPTER XI 
sales of personal property 

§ 1. ^Tature and Formalities of a Sale 

384. Growing importance of this topic. — In the last 
chapter we saw that the early common law did not deem 
personal property of enough importance to give to its 
owner a real action for its recovery. At that time land 
formed the great bulk of the world's wealth. A man's 
social and political rank was determined chiefly by the ex- 
tent and value of his land holdings. A feudal lord was 
great or insignificant, according to the number of his acres 
and of his tenants. With the growth of commerce, however, 
the relative importance of real and personal property has 
undergone a change. According to the census of 1890, the 
value of the real property in this country, including build- 
ings and other improvements thereon, was a little over 
thirty-nine billion dollars, while the value of personal prop- 
erty was nearly twenty-six billion dollars, and the business 
transactions in such property are stupendous in number 
and importance. The value of our exports for the year 
1900 was nearly a billion and a half, while our imports were 
valued at nearly a billion dollars.^ Our farm-crops for that 
year exceeded two billion dollars, and our manufactured 
articles sold for more than ten billions. During the year 
1897 the foreign commerce of the world — that is, the trade 

^ Our exports for the year 1918 exceeded six billions, and our 
imports exceeded three billions, while our domestic commerce 
totaled nearly sixty-nine billions. 

275 



2Y0 ESSENTIALS OF BUSINESS LAW 

between nations — reached a total of twenty billion dollars. 
The domestic commerce of the various nations must have 
amounted to many times that sum. In other word-S, the 
sales of personal property throughout the world reach the 
enormous figures of fully two hundred billion dollars an- 
nually. 

385. Definition of sale. — A sale of personal property is 
the transfer of its general ownership from one person to 
another for a price in money. It is almost always the result 
of a contract between the seller and the buyer. If the con- 
tract provides for the transfer of ownership at once the 
transaction is called " a present sale/' or " a bargain and 
sale," or " an executed contract of sale.'" If it provides 
for the transfer of ownership at some future time it is 
called " a contract to sell," or " an executory contract of 
sale." Viewed as a contract, a sale transaction is subject 
to the principles of law set forth in the chapter on Con- 
tracts, and those need not be repeated in this connection. 
In this chapter we shall be concerned chiefly with the ap- 
plication of those principles and with other legal rules which 
are peculiar to sales of personal property. 

386. Distinction between sale and similar transactions. 
— The business transaction most nearly resembling a sale 
is that of barter, or the transfer of one article of personal 
property for another, as when A and B trade horses, or 
wagons, or oats, or cows. It differs from a sale only in 
this, that the consideration for each transfer is the counter- 
transfer of a chattel instead of money. Next to barter in 
its likeness to sale is a mortgage of personal property, 
usually called a chattel mortgage. This, in form, is a sale, 
but it contains a proviso that if the mortgagor pays a cer- 
tain amount of money, or does some other act, at a stipulated 
time, the sale shall be void. Even though the mortgagor 
does not perform the promised act at the agreed time, he 
still has the right to redeem the property from the mort- 



SALES OF PERSONAL PROPERTY 277 

gage by paying his debt with interest. In other words, a 
chattel mortgage does not transfer general ownership, or 
absolute property in the chattels, while a sale does. 

A sale differs from a bailment, as we saw in the chapter 
on Bailments. The former is the transfer of title to goods, 
the latter of their possession. A bailee undertakes to re- 
store to the bailor the very thing bailed, although it may be 
in a changed form, while the buyer is to pay money to the 
seller for the subject-matter of their contract. 

387. Quasi-sale. — Although a sale, in the proper sense 
of the term, involves a contract, a quasi-sale, a "sort of 
sale," may take place without a contract. If X takes my 
horse and converts it to his own use I may sue him for the 
wrong which he has done me. In case I obtain a judgment 
against him for the value of the horse, and he pays the 
judgment, the law confirms his title to the horse'; it treats 
him as though he had bought it at the time when he wrong- 
fully took it. But he does not get the title unless he pays 
the judgment. 

388. Formalities of the sale contract. — Unless a sale 
contract comes within the provisions of the statute of 
frauds no formalities are required. It may be in writing 
or by word of mouth ; the price may be paid or its payment 
may be promised for a future day; the goods may be de- 
livered to the buyer or remain with the seller. In either 
case, if the minds of the parties have met upon the proposi- 
tion to sell and to buy certain property for a money price, 
there is a valid contract of sale. Unfortunately (as the 
writer thinks) the statute of frauds embraces most sale 
transactions. If the price or value of the article contracted 
for amounts to or exceeds a certain sum — ten pounds in 
England, thirty to twenty-five hundred dollars in the 
States of this country — a contract of sale, to be enforceable 
under this statute, must be evidenced by a memorandum in 
writing signed by the party to be charged, or by a part 



2 78 ESSENTIALS OF BUSINESS LAW 

payment of the price, or hy an acceptance and receipt of a 
part of the goods by the buyer. 

It will be observed that the statute does not render the 
sale void if its formalities are not observed. It only en- 
ables the party who is sued for breach of the contract to 
defend the action successfully, provided he sets up the lack 
of compliance with the statute as a defense. 

389. What contracts are within the statute? — This 
question has given rise to much litigation, and courts have 
differed widely in answering it. Upon principle the an- 
swer would seem to be that the statute includes every con- 
tract which has for its final object the transfer of title to 
personal property from one person to another. Such is the 
approved answer in England. Hence, a contract by a den- 
tist to supply another with a set of false teeth for a price 
exceeding ten pounds was held to be within the statute. 
The buyer died before the teeth were finished, and her 
executor refused to take and pay for them. As the de- 
ceased had not signed a written memorandum of the con- 
tract, or paid any part of the price, or accepted and received 
any part of the set of teeth, the dentist was beaten in his 
action for the contract price. 

Missouri, and perhaps one or two other States have 
accepted the English view; but most of our courts have re- 
jected it, although they are not agreed as to the rule which 
should take its place. The two rules which prevail most 
widely in this country are known as the New York rule and 
the Massachusetts rule, because they were first established 
in those States. According to the New York rule the thing 
contracted for must be in existence and susceptible of de- 
livery under its contract name at the time the contract is 
made, or the statute will not apply. Under this rule a con- 
tract of a dentist to make a set of false teeth, or of a manu- 
facturer to supply any product of- his establishment, is out- 
side the statute, and is binding; while a contract to supply 



SALES OF PERSONAL PROPERTY 270 

,«i the future an article which is in existence at the making 
'^f the contract is within the statute, and not enforceable 
unless there has been part payment of the price, or part 
acceptance and receipt, or a written memorandum. 

The Massachusetts rule has been stated by a learned 
judge of that State as follows : " A contract for the sale of 
articles then existing, or such as the vendor in the ordi- 
nary course of his business manufactures or procures for 
the general market, whether on hand at the time or not, is 
a contract for the sale of goods, to which the statute ap- 
plies. But, on the other hand, if the goods are to be manu- 
factured especially for the purchaser, and upon his special 
order, and not for the general market, the case is not within 
the statute." Under this rule a contract for the sale of a 
wagon, thereafter to be manufactured by the seller, will be 
within the statute if it is to be made like those which he 
habitually makes for the market, while if it is to differ in 
any respect from those — in the color of the paint, in the 
width of the stripes, in the texture or appearance of the 
lining or the like — it is outside the statute. 

390. The memorandum. — The statute does not require 
a full and formal written contract. All that it calls for is 
a memorandum in writing of the oral agreement which the 
parties have made. It assumes that they are busy men and 
have but a moment for jotting down this memorandum. It 
may be written in ink or with a lead-pencil. It may be 
partly printed and partly written. Abbreviations may be 
used instead of full words or phrases ; and, under the Eng- 
lish statute as well as in most of our States, the signature 
may be in any part of the memorandum. In New York, 
the signature must be subscribed or written underneath 
the body of the memorandum. It is not necessary that 
both parties sign. The statute calls for the signature of 
the party to be charged — that is, the one against whom 
a claim is made under the contract — and it permits this 



280 ESSENTIALS OF BUSINESS LAW 

signature to be made by any duly authorized agent of 
such party. 

While the memorandum need not be formal, it ought to 
contain all the terms of the oral agreement. It should 
state the names of the parties, or identify them; it should 
also describe or identify the thing contracted for, and if a 
price has been agreed upon it must specify that. 

391. Part payment. — Even though a written memoran- 
dum has not been made, the contract will be enforceable by 
either party, if the buyer has paid a part of the purchase 
price. In the English statute, the giving of something in 
earnest to bind the bargain is provided for, and similar 
language is used in some of our State statutes ; but accord- 
ing to the prevailing view in this country " earnest " and 
" part payment ^' are the same thing. In New York and 
a few other States the part payment must take place at the 
time of making the contract. This requirement, however, 
is peculiar. The general rule is that it may be made at any 
time before suit is brought upon the contract. It is not nec- 
essary that money be used. A part payment may be made 
by check, by property, or by services if the parties so agree. 

But the mere tender, even of money, will not satisfy the 
statute. In a leading case on this point, a party had orally 
contracted to sell a quantity of cheese to another and called 
on the purchaser to make a part payment to bind the bar- 
gain. The latter tendered the money, whereupon the seller 
refused to receive it, and the court held that he had the 
power thus to defeat compliance with the statute by the 
buyer. The case is a good illustration of the temptation 
which the statute holds out to a man to break his word. 
The price of cheese had gone up, and the seller could make 
money by breaking his promise and selling to another. The 
statute enabled him to do this with impunity. 

392. Acceptance and receipt. — Still a third way of satis- 
fying the statute is by the buyer accepting and receiving a 



SALES OF PERSONAL PROPERTY 281 

part of the property contracted for. This language of the 
statute has given rise to a vast amount of litigation, and 
many of the decisions upon this point are very unsatisfac- 
tory. In this country, it is generally held that an act of 
acceptance under the statute is such an act as precludes the 
buyer from thereafter rejecting the part accepted — an act 
of distinct and final approval of it a;s being in accordance 
with the contract. 

Receipt by the buyer is the correlative of delivery by the 
seller. A buyer receives property when he or his authorized 
agent takes control of it as owner with the consent of the 
seller. A common carrier, who is authorized to transport 
the property from the seller to the buyer, is agent of the 
latter to receive but not to accept it under this statute. 

An acceptance and receipt of any part of property con- 
tracted for satisfies the statute as to all of it. Such accept- 
ance and receipt, however, does not cut the buyer off from 
his right to reject the remainder of the property when it 
is tendered to him if it does not conform to the contract. 
For example, A contracts for a car-load of lumber of speci- 
fied kind and quality for three hundred dollars. A wagon- 
load of it is brought to his premises. He examines it and 
tells the driver to unload it. Afterward he notifies the 
seller he will not take any more. The seller can maintain 
an action against him on the oral contract for the price of 
the whole, notwithstanding there was no memorandum in 
writing and no part payment, provided he can show that all 
of the lumber conformed to the contract. On the other 
hand, the buyer has the right to reject any part of the 
lumber that does not conform to the contract. 



§ 2. When Title Passes 

393. In case of bargain and sale. — When the transaction 
is one of " bargain and sale," or, as it is also called, " a 



282 ESSENTIALS OF BUSINESS LAW 

present sale/' or " an executed contract of sale," title passes 
as soon as the contract is made. A offers his horse to B 
for two hundred dollars, and B accepts the offer. It is a 
bargain and sale. The moment B accepts the offer he be- 
comes owner of the horse, and A is entitled to receive at 
once two hundred dollars. Had A's offer been : " I will sell 
you my horse now for two hundred dollars, and give you a 
month in which to pay for him," and B had accepted the 
offer, the transaction would still have been a bargain and 
sale, although a sale on credit. B would have become the 
owner of the horse, but A would not be entitled to his money 
for a month. 

394. The doctrine of potential existence. — Ordinarily a 
present sale can be made only of property which is in 
actual existence. That is the invariable rule in England at 
present. In this country, however, most courts have 
adopted the doctrine of an old English case, decided in 
1608, to the effect that things which are the natural product 
or expected increase of something already owned by the 
seller, are to be treated as having a potential existence, and, 
hence, as proper subjects of a present sale. Accordingly, 
a person may make a present sale of the future offspring of 
his animals ; or of products from them, as milk, or butter, 
or eggs, or wool ; or of the future crops of his land. After 
making such a contract no further act is necessary by either 
seller or buyer to pass title from the former to the latter. 
As soon as the thing comes into actual existence the buyer's 
title and right to possession are perfect. 

395. In case of an agreement to sell, title never passes 
at the time the contract is made. At what time in the 
future it is to pass from the seller to the buyer depends 
upon two considerations : First, the nature of the thing 
contracted for; second, the intention of the parties to the 
contract. 

The first consideration can be disposed of very quickly. 



SALES OF PERSONAL PROPERTY 233 

If the thing contracted for is not in existence (actually or 
potentially) it is clear that title can not pass until it comes 
into existence. For example, L borrows money from P and 
gives him a writing, that he thereby sells, assigns, and sets 
over to P all the halibut that he and his crew may catch 
on their next voyage. Although the language of the agree- 
ment is that of a present sale it can not take effect as such, 
for the halibut are not yet caught. 

396. The intention of the parties, (a) If expressed. — 
Assuming that the subject of the contract is in existence, 
or that it comes into existence before the time named by 
the parties for title to pass, it is well settled that title will 
pass at the time "agreed upon and not before. The common- 
est example of this sort of transaction is the " conditional 
sale." Sewing-machines, pianos, and various other articles 
are sold upon the express condition that title is not to pass 
to the purchaser until they are paid for. In the absence of 
a statute on the subject the common law gives full effect 
to this contract; enables the seller to keep the title, and 
prevents the buyer from passing the title to anybody else 
until the entire price is paid. In some States, however, leg- 
islation requires such a contract to be reduced to writing, 
and filed in the office of the town clerk or similar official, in 
order to prevent the buyer from passing title to his creditors 
or to bona fide purchasers. 

397. (b) Intentio.n implied from conduct. — Very often, 
indeed, in the great "majority of cases, the parties to a sale 
contract do not state in express terms their intention as to 
the time when title is to pass. If a lawsuit arises from such 
a transaction it becomes necessary for a court to decide 
what the implied intention of the parties was. To enable 
it to do this satisfactorily certain rules have been adopted. 
It should be borne in mind that these rules are applied 
only when the parties have failed to express their inten- 
tion. 



284 ESSENTIALS OF BUSINESS LAW 

398. Rule First. A present sale of existing goods is 
presumed. — When the articles contracted for are in exist- 
ence, and ready to be handed over in accordance with the 
contract, the law presumes the parties to intend an imme- 
diate transfer of title. If A says to B, '' I will give two 
hundred dollars for your horse and will pay you within a 
week," and B accepts the offer, the law presumes a present 
sale. The title passes at once to B, and, though the horse 
may be killed by a stroke of lightning before B can take 
him from A's pasture, B must pay for him, because the 
loss from the accidental destruction of personal property 
falls upon the owner. 

399. Rule Second. When goods are not in deliverable 
condition. — Although the articles are in existence when 
the sale contract is made, if the seller is to do anything to 
them before he can call on the buyer to accept them as corre- 
sponding to the agreement, the law presumes that title is not 
to pass until that is done. In a leading N'ew Jersey case, 
a party contracted for the sale of a lot of corn, which he 
was to shell before it was delivered. The court held that 
the intention of the parties to be implied from their con- 
tract, was that title should not pass until the seller had 
shelled the corn, and thereby put it into the condition called 
for by the contract. 

400. Rule Third. Sale on approval. — Oftentimes a con- 
tract of sale provides that the buyer may have a certain 
time for the trial of the article sold. In such cases the 
law presumes that title is not to pass until the trial has been 
made and the article approved by the buyer. His approval 
may. be established either by his admission that the article 
is satisfactory or by his use of the property as his own. 

A contract of " sale or return " is treated in England 
as a sale on approval. In this country, however, such a con- 
tract — that is, a contract of sale with the privilege on the 
part of the buyer to return the property within a given time, 



SALES OF PERSONAL PROPERTY 285 

if he wishes to — passes title to the buyer, but gives him the 
right to pass it back to the seller. So long as title remains 
in the buyer he must bear the loss if the property is acci- 
dentally destroyed. In case of a sale on approval, the loss 
would fall on the seller, if it occurred before the article had 
been approved by the buyer. 

401. Rule Fourth. Subsequent appropriation of the 
goods to the contract.^The foregoing rules, it will be ob- 
served, apply chiefly to things which are in existence when 
the contract is made. We now pass to the rule applicable 
to contracts for the sale of future or unascertained goods — 
that is, of goods which can not be specified or set aside at 
the time of the contract, but which are to come into ex- 
istence, or to be appropriated to the contract at a future 
day. For example, a manufacturer agrees to make and 
ship certain goods within a specified period, or a dealer 
takes an order for goods which he is to purchase from others 
and apply to the contract. 

In such a case, the law presumes title to pass as soon as 
the agreed articles have been unconditionally appropriated 
to the contract by either party, with the assent of the other. 
This rule, it will be noticed, involves three elements. If 
either is lacking title will not be presumed to pass. First, 
the goods must be such as the contract calls for. If the 
contract is for No. 1 wheat the seller does not perform the 
contract by offering No. 2 wheat, and an unconditional 
appropriation of such wheat will not pass title to the 
buyer. 

Second, the appropriation must be unconditional. If 
the seller ships No. 1 wheat to the buyer, and takes a biR 
of lading from the common carrier, which states that the 
wheat is to be delivered to the seller or his assiofns, he 
thereby keeps the title in him'^e^f. The wheat i« ar)T)ropri- 
ated to the contract cend'tionallv. +hp p^nrlition being that 
the buyer shall pay for it before getting title. 



286 ESSENTIALS OF BUSINESS LAW 

Third, both parties must assent to the iirLconditional ap* 
propriation of the agreed articles. If is true this assent by 
one may precede the appropriation by the other. Such is 
the case where the buyer orders the seller to ship goods 
from a distance. By this order the buyer gives his implied 
assent in advance to the seller's appropriation of the goods, 
provided they conform to the contract. 

402. A seller who has not title can not give title. — This 
is the general rule of the common law. In England three 
exceptions to it are recognized. The first is that of sales in 
market overt,^ to persons who buy in good faith, with- 
out notice of any defect in the seller's title. This exception 
does not obtain in this country, as a market overt has never 
existed here. Accordingly, if A buys a horse in a public 
market, or at a private sale, from one who is not its owner 
and one who has neither actual nor apparent authority from 
the owner to sell it, he gets no title. The true owner may 
take it from him, and A must look to the seller for redress. 

The second exception to the general rule above stated 
relates to sales of negotiable paper. It prevails in this 
country as well as in England. As we dealt with it quite 
fully in the chapter on Negotiable Paper, we do not need 
to explain it here. 

403. Factors acts. — The third exception has been cre- 
ated by statutes known as factors acts. In England those 
statutes enable mercantile agents who, with the consent of 
the owner, are in possession of goods, or of the documents 
of title to goods, to sell, pledge, or otherwise dispose of them 
in the ordinary course of their business, even in violation 

^ A market overt in England is a market held at stated intervals 
and in a particular place, by virtue of a charter from the Crown or of 
prescription. It does not include the whole town where the market is 
held, but only the market-place. In London, however, every shop in 
which goods are exposed publicly for sale is a market overt for such 
things as the owner professes to trade in. 



SALES OF PERSONAL PROPERTY 287 

of their instructions from the owner, and in excess of their 
authority as agents. In this country, factors acts have 
been passed in but a few States, and they have but sHghtly 
modified the common-law rule that a seller can not give 
title to personal property unless he is its owner or that 
owner's agent. 

§ 3. Duties of the Seller 

404. These are threefold.^If we recall the definition of 
a sale, as a transfer of the general ownership of certain 
personal property from one person to another for a price 
in money, we will see that the duties of the seller are three- 
fold : First, to transfer title to the buyer. Second, to fur- 
nish the agreed thing. Third, to give possession of it to 
the buyer. 

405. To confer title on the buyer. — This duty would 
seem to be unquestionable. And yet it was long a matter 
of doubt in England. It was thought by many eminent 
lawyers there that the buyer of personal property took 
the risk of title on himself, unless the seller expressly war- 
ranted his ownership. In this country, however, the courts 
have always held that the seller of personal property which 
is in his possession, by the very act of sale and without 
any express words on the subject, promises that he has title 
and that he will confer it upon the buyer. Such, too, is 
the present rule in England. 

Of course, if the seller offers not the full ownership of 
the goods, but only such interest as he has in them, the im- 
plied promise as to title will be negatived, and the buyer 
will get such title as the seller had and no more. Of this 
class are sales by an assignee in bankruptcy, by an adminis- 
trator or executor, by a constable or sheriff, of goods which 
have come into his hands in his official capacity. It is 
understood that he makes no personal promise as to title; 
that he sells only such interest as came to him. 



288 ESSENTIALS OF BUSINESS LAW 

406. To furnish the agreed thing. — All authorities con- 
cur that this duty exists ; the only differences of opinion re- 
late to its extent. We shall not undertake to point out and 
discuss those differences in detail, but to state the views 
which generally prevail in this country. 

If two persons contract for the sale and purchase of a 
particular thing, which the buyer has full opportunity to 
examine, the seller performs his duty when he delivers that 
thing to the buyer. It may be that it is not of the quality 
or condition which the buyer thought it was, but if the 
seller does nothing to mislead or defraud him the buyer 
must take the thing for better or for worse. The rule in 
such a case is expressed by the common-law maxim caveat 
emptor — let the buyer beware. 

407. Sale by description. — Such a sale as was referred 
to in the last paragraph is known as a sale upon inspection. 
A sale by description is a very different affair, and is gov- 
erned by a different rule. Suppose A orders from B a 
horse, well broken and safe, and fit for a lady to drive, and 
B furnishes a horse pursuant to the order for which A 
pays B's price. Here A does not examine and pass judg- 
ment on the animal, but relies on B's skill and judgment to 
supply the sort of horse described in the order. B does 
not perform his contract by furnishing a horse that fails 
to comply with the description. A can reject the horse 
and recover the price which he paid. This class of cases is 
very extensive, embracing substantially every sale transac- 
tion, where the buyer has no opportunity to inspect the 
thing bought and where he has a right to rely and does 
rely upon the seller's description, as a statement of the 
quality or condition of the thing bargained for. 

408. The goods must be merchantable. — Whenever the 
sale of goods is one by description the seller is bound to 
supply goods which are salable in the market under that 
description; in other words, goods that are merchantable. 



SALES OF PERSONAL PROPERTY 280 

In the language of an English chief justice, when deciding 
a case nearly a hundred years ago : '^ The purchaser has a 
right to expect a salable article answering the description 
in the contract. He can not, without a warranty, insist that 
it shall be of any particular quality or fineness ; but the in- 
tention of both parties must be taken to be that it shall 
be salable in the market. The purchaser can not be sup- 
posed to buy goods to lay them on a dunghill." 

A person, who agrees to sell sugar, does not perform his 
contract by supplying sugar so adulterated as not to be mer- 
chantable as sugar. In a modern Massachusetts case it 
was held that four per cent of sand in a quantity of sugar 
did not render it unmerchantable. Whether an article is 
merchantable or not is generally a question of fact for 
the jury to decide. 

409. Fit for particular purpose. — Whenever the buyer 
informs the seller that he wants the article for a particular 
purpose, and that he relies on the seller's skill and judg- 
ment in filling the order, it is the duty of the seller to 
supply an article thus fit for the purpose. For example, A 
orders a quantity of cloth to be made up into servants' 
liveries. The seller supplies cloth which is unfit for that 
use, owing to a defect arising from a particular mode of 
manufacture. He has broken his contract, and is liable to 
the buyer for such damages as that breach has caused. 
Again, a manufacturer of windmills accepts an order for a 
windmill to be set up at a particular place on the buyer's 
farm. He is bound to supply a windmill that is fit for use 
at that place. If he puts up one that will not work there, 
although it might work somewhere else, the buyer is not 
bound to pay for it, but on the other hand has a right to 
damages against the seller. 

410. Duty to give possession. — Not only must the seller 
confer title on the buyer and furnish the very thing agreed 
upon, but he is bound to give possession of the thing to the 



290 ESSENTIALS OF BUSINESS LAW 

buyer. The only exception to this rule exists when the 
parties agree that the buyer is to run his own risk of get- 
ting possession — as when the owner of a sunken vessel sells 
it to one who takes his chances of raising it, or the owner 
of a lost animal sells it to one who takes the risk of find- 
ing it. 

This duty of giving possession, however, is a condi- 
tional one, unless the parties do away with the condition by 
agreement. It is conditioned upon the buyer's paying the 
price. If A offers his horse to B for two hundred dollars, 
and B accepts the offer, title passes at once, as we have 
seen, and A is bound to give possession of the horse to B. 
But B is bound on his part to pay the price, as a condition 
of taking possession, unless the sale is on credit, or A has 
in some other way agreed to give up the condition. 

411. Where possession is to be given. — If a place for the 
delivery of the article is not specially agreed upon, the law 
declares that, in case of a present sale, possession is to be 
given at the place where the article is at the time of sale. 
In case of an agreement to sell in the future, the legal place 
of giving possession, in the absence of an agreement to the 
contrary, is the seller's residence or his place of business. 
If the seller is engaged in business, and the article is one 
which he deals in at his place of business, delivery is to be 
made there; otherwise at his residence. 

412. Express warranties. — The obligations of the sell- 
er, which we have thus far discussed, are, as a rule, implied 
from the circumstances of the sale. They are often called 
implied warranties to distinguish them from express war- 
ranties, which we are now about to consider. 

The term " warranty," however, is not a very happy 
term to apply to one of those implied promises or engage- 
ments of the seller. In order to avoid confusion, " war- 
ranty " ought to be limited to an agreement, which is added 
to the sale contract, but is not one of the terms of that 



SALES OF PERSONAL PROPERTY 291 

contract. On that account we have refrained from calling 
any of these implied engagements of the seller warranties. 
The following is an example of an express warranty, using 
the term in its narrow, and, as we think, its only proper 
sense : A offers his horse to B for two hundred dollars. B 
answers, " I will take him at that price if you will warrant 
that he is sound. '^ A replies, " I warrant him sound," or 
" He is as sound as a dollar," or " He is as sound as any 
horse in the world." Here is a sale of the horse with an 
express warranty added. By the contract of sale title 
passes to B and he is bound to pay the price. By the 
collateral or additional agreement of warranty A is bound 
to pay B damages if the horse is not sound. 

The word warrant need not be used in order to have 
an express warranty. Any positive statement of fact by 
the seller as to the nature, quality, or condition of the 
thing which he offers for sale, inducing the other party to 
buy, is generally to be regarded as a warranty. 

§ 4. Duties of Buyers 

413. To take title to the goods.— The first duty of the 
buyer is to take title to the thing which he has agreed to 
buy. If the transaction is a bargain and sale the title passes 
to the buyer the moment the bargain is struck, and he can 
not throw it back upon the seller without his assent. From 
that moment the risk of loss is on the buyer. Although the 
property may be destroyed or may fall in value, he must 
pay the agreed price. 

But suppose the transaction is a contract to sell. Can 
the seller force title upon the buyer by tendering the agreed 
article? In England and in many of our States he can 
not. Even though the seller tenders the very thing which 
the contract calls for, and tenders it at the stipulated time 
and place, the buyer can prevent title passing to him by 



292 ESSENTIALS OF BUSINESS LAW 

refusing to accept it. Of course such a refusal is a breach 
of his contract, and the seller is entitled to recover damages 
for that breach. But that is his only right. The title to 
the property is still in him, and he must take care of the 
property and dispose of it as best he can. In some of our 
States the seller may, in certain cases, force title upon the 
buyer by tendering the agreed article at the proper time 
and place. 

414. To take possession. — Not only is the buyer bound 
by his contract to take title, but it is his duty to take pos- 
session of what he has bought. If no time is stipulated in 
the contract, it is his duty to take possession within a rea- 
sonable time after title has passed to him. In case he does 
not he becomes liable to the seller for a reasonable charge 
for its care and custody, and also for any damage occasioned 
to the seller by his neglect to take the property away. 

415. To pay for the property. — The third duty of the 
buyer is to pay for what he buys. When the price is agreed 
upon he is bound to pay that sum. If no price is named 
the law declares that he must pay a fair and reasonable 
price. If the goods are salable in the general market, such 
as grain, or fruit, or other articles of ordinary merchandise, 
he must pay their market price. When the goods have not 
a market price, or when the market price has been unfairly 
raised or lowered by a " trust " combination, or by specu- 
lators who have " cornered " the market, the buyer dis- 
charges his duty by paying what the goods were fairly worthy 

§ 5. Remedies of the Seller 

416. The seller's remedy by action for the price or for 
damages. — After the title has passed to the buyer, if he 
fails to pay for the goods when he ousfht to pay, the seller 
is entitled to sue him for the price. If the buver improperly 
refuses to accept the goods when they are tendered, and thus 



SALES OF PERSONAL PROPERTY 203 

to take title, the seller may sue him for the damages caused 
by this refusal. Such damages are, ordinarily, the dif- 
ference between the contract price and the market price at 
the time and place of delivery under the contract. If the 
goods are not such as are sold in the general market the 
damages are the difference between the contract price and 
their reasonable value at the stipulated time and place. For 
example, A contracts to sell his growing crop of hops and 
deliver it to B in New York, October 1st following, at 
twenty cents a pound. Hops fall in price, and on October 
1st the market rate in New York is twelve cents a pound. 
B refuses to take the hops, thus breaking his contract. A 
is entitled to recover from B eight cents a pound as dam- 
ages. B having refused to take title to the hops, they still 
belong to A, and he may sell them or keep them as he 
pleases. If he keeps them he is entitled, of course, to any 
gain which comes from the price advancing after October 
1st, and he must bear any loss consequent upon a further 
fall in price. 

417. The seller's right of lien. — Even though title to 
the goods has passed to the buyer, and the risk of loss 
thereafter is upon him, the seller may have the right to 
hold them as security for the purchase price. This is called 
the seller's right of lien, and is a very important right. 
Whenever the sale is for cash this lien entitles the seller to 
retain possession of the goods until cash is paid. Even 
when the sale is upon credit, if the goods or any part of 
them remain in 'the seller's possession, after the term of 
credit expires, the right of lien entitles the seller to hold 
such goods until payment is made. Again, if goods are 
sold on credit, say of thirty days, and before the expiration 
of the credit period, the buyer becomes insolvent, the seller 
has a right to hold any of the goods remaining in his pos- 
session as security for the purchase price. Neither the in- 
solvent buyer nor a purchaser from him, nor his assignee in 



294 ESSENTIALS OF BUSINESS LAW 

bankruptcy or insolvency, has a right to take the goods with- 
out paying what is due to the seller. 

418. Right of stoppage in transitu, (a) Its origin and 
nature. — This is another important right of the seller 
against the goods, after their title has passed to the buyer. 
Like the right of lien, it originated in the custom of mer- 
chants, and has been adopted by the common law from the 
law merchant. By this right a seller, even after parting 
with the possession of the goods, may stop the common car- 
rier from delivering them to the buyer, and thus regain 
his seller's lien. The conditions of exercising this right are 
these : The goods must be unpaid for in whole or in part ; 
the buyer must be insolvent ; the goods must be in the hands 
of a middleman, usually a common carrier, on their way 
from the seller to the buyer. 

The object of this right, it will be noticed, is to protect 
the seller against the insolvency of the buyer, and to pre- 
vent the seller's property from being applied to the pay- 
ment of the buyer's debts to other persons. 

419. (h) Insolvency in this connection. — It is not neces- 
sary for the seller to show that the buyer has been adjudged 
a bankrupt or insolvent, nor that he has made an assign- 
ment for the benefit of his creditors, nor that he has failed 
in business. It is enough that the buyer has afforded the 
ordinary evidence of insolvency by his conduct in business ; 
that he has let his commercial paper go to protest, or has 
suffered judgments to be taken against him without making 
any defense, or his property to be attached for debts, or 
the like. Any circumstances showing that the buyer can 
not pay his debts, ^as they come due in the regular course of 
business, will ordinarily justify the seller in treating him 
as insolvent. 

420. (c) How the right is exercised. — The law does not 
require the unpaid seller to observe any particular form in 
exercising this right. The most that it requires him to 



SALES OF PERSONAL PROPERTY 295 

do is to give notice to the common carrier who has the 
goods not to deliver them to the buyer. He may also exer- 
cise it effectually by taking actual possession of the goods 
from the carrier, or from a warehouseman, or from any 
one else, before they have reached the possession of the 
buyer. If the goods are in the hands of a railroad or steam- 
ship company or other large carrier, notice of stoppage 
may be given either to the particular agent who happens 
to be in control of them, or to the company or principal 
through a general agent. In the latter case the company 
has a reasonable time in which to communicate the notice 
to its proper agent or servant. 

42 L (d) The common carrier is bound to comply with 
the notice. — If a common carrier or other middleman de- 
livers the goods to the buyer after valid notice of stop- 
page in transitu has been given, he is guilty of wrong-doing 
against the unpaid seller, and may be compelled to pay him 
for them. In order to render the carrier thus liable, the 
notice must be a valid one — that is, it must have been made 
properly, and the seller's right to make it must not have 
been waived or lost. 

The way in which he most frequently loses the right 
is by a transfer of the bill of lading for the goods. For 
example, X in New York sells and ships goods to Y in 
Chicago. When he delivers them to the carrier he takes a 
bill of lading — that is, a document by which the carrier 
acknowledges that he has received the goods, and promises 
to transport them to Chicago and there deliver them to Y 
or his assigns. This bill of lading is sent to Y. If he trans- 
fers it to a banker or other person, who takes it for value 
and in good faith, such transfer ends the unpaid seller's 
right to stop the goods. This is due to the fact that the 
common law following the law merchant treats a bill of 
lading as having some of the qualities of a negotiable in- 
strument. Its transfer to a bona fide purchaser gives him 



206 ESSENTIALS OF BUSINESS LAW 

a better title to the goods represented by it than his trans- 
feror had. The moment a bill of lading is transferred to a 
purchaser for value and in good faith, he acquires all the 
rights he would have obtained had the goods reached their 
destination and then had been actually delivered by the 
original buyer to him. 

432. Right of resale. — After the seller has regained his 
lien on the goods by stopping them, he is not bound to hold 
them indefinitely. The buyer, or his assignee in bankruptcy 
if he has become bankrupt, must pay for the goods within 
a reasonable time, or the seller may resell them. In bring- 
ing them to a resale he must act fairly toward the buyer. 
It is wise for him to give the buyer notice of the time and 
place of sale, so that the latter may have people there to 
bid and thus prevent the goods from selling for a song. 
If they sell for more than enough to pay the amount due to 
the seller and the expenses of the sale, the balance belongs 
to the buyer. If they sell for less, the seller has a claim 
against the buyer for the deficiency. 



§ 6. Eemedies of the Buyer 

423. Action to recover the goods. — If the transaction is 
one of bargain and sale, or, although it was at first merely 
an agreement to sell, if title has subsequently passed to the 
buyer, he has a right to the goods themselves. It is true he 
must be ready to pay for them, unless the seller has agreed 
to give him credit as a condition of getting them; but as 
soon as he does pay or tender payment the seller must 
deliver the goods. If he refuses to, the buyer may bring 
an action to recover them or their value. 

In some cases he is permitted to recover the very thing 
he contracted for, although title had not passed. Such an 
action is called one for " specific performance." It forces 
the seller to deliver the article itself, instead of paying dam- 



SALES OF PERSONAL PROPERTY 297 

ages for the breach, of his contract. Cases of this sort are 
comparatively rare. Ordinarily the buyer can be fully com- 
pensated by a judgment for damages. When, however, such 
a judgment will not afford the buyer adequate remedy, he 
is entitled to a judgment compelling the seller to turn over 
to him the thing contracted for. Examples of this class 
of cases are the following: Contracts for the sale of a patent 
right, for the sale of a unique old altar-piece, for the sale 
of articles which can not be duplicated or the equivalent 
of which can not be obtained elsewhere, and the like. 

424. Action to recover damages. — This is the remedy 
most frequently resorted to by the buyer when the seller 
refuses to perform his contract, or when he tenders goods 
which do not comply with the agreement. In such an action 
his damages, ordinarily, are the difference between the con- 
tract price of the goods and their market price at the time 
and place of their delivery. If there is no market price 
for them there, then the buyer must show what was their 
fair value. 

At times he is entitled to recover in addition to the 
general damages, which we have just described, a sum by 
way of special damages. This is the case whenever the seller 
understands that a breach of his contract will naturally 
result in special loss to the buyer. When a retail dealer 
orders goods from a wholesaler, the latter knows full well 
that the former proposes to resell the goods at a profit. 
Accordingly, if the wholesaler fails to furnish the goods, 
and the retailer can not get them elsewhere in time for 
his trade, he may recover from the wholesaler not only 
the difference between the contract price and the market 
price, but such profits as he can show he would have made 
by retailing the goods. 

425. Extraordinary special damages. — Not infrequently 
a seller is compelled to pay very large sums as special dam- 
ages. This is illustrated by a recent case in New York, 



298 ESSENTIALS OF BUSINESS LAW 

The seller contracted to deliver a quantit}^ of powder to the 
buyer in Cuba while that island belonged to Spain, and to 
procure proper permits from the Spanish Government for 
the landing of the powder. He failed to procure the per- 
mits, and when the powder was landed it was seized and 
confiscated by the Spanish officials, and the buyer was com- 
pelled to pay a large fine for having powder in his possession 
without the required permits. When the seller sued for the 
price of the powder the buyer denied liability therefor, and 
set up a claim against the seller for the fine which he had 
been forced to pay. The court decided in the buyer's favor, 
and gave him judgment against the seller for $3,472.49 — 
the amount of the fine — with interest from the date of its 
payment. 

426. For breach of warranty the buyer has a claim for 
damages. If he has paid the price he may sue for the dam- 
ages. If he has not paid it he may set up his claim by 
way of a partial defense to an action against him for the 
price. This is his only right in England and in many of 
our States, unless the seller was guilty of fraud in indu- 
cing him to buy. In some of our States, however, the courts 
give the buyer the same right to rescind a sale contract for 
an innocent warranty that they do for fraudulent repre- 
sentations. 

427. The measure of damages for a breach of warranty 
is ordinarily the difi^erence between the actual value of the 
article sold and its value if it had been such as it was war- 
ranted to be. In a recent English case a dealer in orchids 
sold a plant, warranting it to be a white orchid. When it 
flowered two years later it proved to be a purple orchid. 
Had it flowered white it would have been worth one hundred 
guineas, but as a purple orchid it was worth only seven 
shillings sixpence. The purchaser was entitled to the dif- 
ference between those sums^ 

The buyer may be entitled to special damages for breach 



SALES OF PEESONAL PROPERTY 299 

of warranty, as the following case shows : The defendant 
contracted to supply plaintiff with a huge refrigerator, 
which would freeze and keep chickens for the following 
spring market. Plaintiff received the refrigerator and filled 
it with chickens. They did not keep for the spring market, 
but spoiled. When the defendant was sued for damages he 
insisted that he was liable only for the difference between 
the value of the refrigerator, had it worked as he warranted 
it would, and its value as it was. The court held that such 
would have been the measure of damages had the plaintiff 
not lost anything by using it. But as the defendant knew 
that plaintiff was intending to use it for keeping chickens, 
he was liable in special damages for the market price of 
the chickens in the spring (which was shown to be forty 
cents a pound), less the cost of getting them to the market, 
including freight and charges for selling them. 

§ 7. Unifoem Sales Act 

428. Its history and character.— This statute was pre- 
pared by the Commissioners on Uniform State Laws, with 
the English Sale of Goods Act of 1893 as its model. In its 
final form, however, it differs from the model and from the 
rules stated in foregoing text in several particulars. It has 
been adopted (1918) in eighteen jurisdictions.^ 

429. Statute of frauds. — This provision of the act ap- 
plies to goods or choses in action; and goods are defined as 
embracing all chattels personal other than things in action 
and money, inclusive of " emblements, industrial growing 
crops, and things attached to or forming a part of the land 
which are agreed to be secured before sale or under a con- 
tract of sale." A contract for the sale of standing trees is, 

^ In Massaclmsetts it is Ch. 237, L. 1908. In New York it is 
Ch. 571, L. 1911, and forms a part of the Personal Property Law, 
§§ 82-166. 



300 ESSEN"TIALS OF BUSINESS LAW 

therefore, for an interest in real property, but one for the 
sale of wood, or logs, to be cut from those trees is one for 
the sale of goods. 

The act adopts the Massachnsetts rnle stated in para- 
graph 389, and rejects the English and New York rules. 
As the statute has been adopted in New York, it takes the 
place of the old rule on this point as well as on the point 
stated in paragraph 391 about time of part payment, and 
in paragraph 390 as to subscription of memorandum. 

On the subject of acceptance, it provides that this occurs 
" when the buyer, either before or after delivery of the 
goods, expresses by words or conduct his assent to becoming 
the owner of those specific goods.^' 

430. Potential existence. — The act follows the English 
statute in rejecting this doctrine. It defines " existing 
goods " as those " owned or possessed by the seller,^' and 
" future goods " as those " to be manufactured or acquired 
by the seller," and it declares that '^ where parties purport 
to effect a present sale of future goods, the agreement oper- 
ates as a contract to sell the goods." 

431. Conditional sales. — The Conmiissioners on Uni- 
form State Laws have prepared a separate act covering this 
topic, which modifies the common law rules, as well as 
existing statutes, referred to in paragraph 396. Its chief 
objects are to relieve a conditional vendee from forfeiting all 
claim to the property, upon his failure to pay an instal- 
ment of the price, and to enable him to pass title to the 
property, unless the contract is in writing and filed. If 
adopted generally by the States it will greatly improve the 
law on this topic. 

432. Goods represented by document of title. — On this 
point the Uniform Sales Act diverges radically from the 
English statute and modifies common law rules. It defines 
document of title as including any bill of lading, dock war- 
rant, warehouse receipt or order for the delivery of goods. 



SALES OF PERSONAL PROPERTY 301 

or any other document used in the ordinary course of busi- 
ness in the sale or transfer of goods, as proof of the posses- 
sion or control of the goods, or authorizing or purporting 
to authorize the possessor of the document to transfer or 
receive either by endorsement or delivery, goods represented 
by such document. One in possession of such a document, 
if it makes the goods deliverable to bearer, or when it 
makes them deliverable to order if it is endorsed in blank, 
can give a better title to the goods than he has. On this 
point, the Uniform Sales Act has substantially the same 
provisions as those which have been explained in connection 
with bills of ladmg and warehouse receipts. 

433. Warranties. — Here, again, the act differs from the 
English statute and changes the law in many of our juris- 
dictions. The engagements that one who offers an article 
for sale has the right to sell it; that goods sold by descrip- 
tion or by sample shall correspond with the description or 
sample and be mechantable ; that goods sold for a particular 
purpose shall be fit for that purpose, are declared by the 
act to be warranties. In each case, as well as in case of an 
express collateral warranty explained in paragraph 412, if 
the warranty is broken, the buyer has the right to refuse 
the goods. If title to them has not passed to him, he may 
decline to accept them and recover damages for the breach 
of warranty. If title has passed, he may rescind the sale, 
return or offer to return them and recover the price which 
he has paid. In either case, the statute accords him the 
alternative right of keeping the goods and claiming dam- 
ages for the breach of warranty. 



CHAPTER XII 
BANKS AND BANKING 

434. Banking business. — The prime function of a bank 
is to receive deposits and make loans. A bank need not 
be a corporation. It may be the property of an individual, 
and at common law any one could engage in the business 
of banking. A mere money-lender, however, is not a bank- 
er, although he borrows from others the money which he 
loans. But if he receives from others money on deposit, 
becoming their creditor therefor, and permitting them to 
draw checks or orders against these credits, he is engaged 
in banking and is subject to state supervision and control. 

In the Chapter on Negotiable Paper attention was called 
to the fact that centuries ago goldsmiths in London issued 
notes payable on demand, which circulated as money. At 
common law any bank had the right to put into circulation 
its bank notes or bills. It turned out that these were issued, 
not infrequently by bankers who were or who became in- 
solvent, and were not paid on demand, to the serious loss 
of holders and the derangement of trade. Hence, govern- 
ment has intervened and prohibited the issue of bank notes 
by any but duly authorized banks. In the United States 
this class is limited substantially to National Banks and 
Federal Reserve Banks.^ Institutions having this authority 
are known as banks of issue. But it should be borne in mind 

* While many state banks have authority to issue banknotes, it 
is unprofitable for them to exercise the right, because of the Fed- 
eral tax of ten per cent on such notes. 
302 



BANKS AND BANKING 308 

that the issue of paper money is not essential to a banking 
business. It is but a by-product and not a lucrative one, 
in this country, at present, because of the cost to the bank 
of complying with the government requirements for secur- 
ing the redemption of such paper. 

435. Classification of "banks. — Banks are variously 
classified. If looked at with reference to the services they 
perform, they fall into three groups: (1) Savings Banks. 
(2) Investment Bankers. (3) Commercial Banks. 

436. Savings Banks. — ^These are organized for the col- 
lection and profitable use of the savings of persons of 
moderate means. Each depositor has too little for separate 
investment; but the aggregation of many small sums sup- 
plies a savings bank with a large fund. This can be loaned 
on safe security to persons in need of money for building 
homes, buying farms or for other enterprises. Hence, these 
institutions promote the prosperity of their communities, 
while stimulating depositors to make periodic savings, by 
securing to them interest on fragments of income, which 
otherwise might be squandered. 

The savings bank does not receive deposits payable on 
demand checks. It pays interest on sums only which are 
left with it for a stipulated period; and it often has the 
privilege of requiring patrons to give thirty days' notice of 
their intention to withdraw their money. Savings bank in- 
vestments are carefully regulated by statute with a view 
to the complete security of depositors. Hence they consist 
largely in real estate mortgages and securities not quickly 
convertible into cash. 

Mutual savings banks are so organized that the depos- 
itors are the real owners and entitled to the profits. In 
1918, their total resources, in the U. S., were nearly five 
billions, and their surplus more than three hundred mil- 
lions. Stock Savings Banks are corporations, whose stock- 
holders are entitled to all profits after paying depositors 



304 ESSENTIALS OF BUSINESS LAW 

an agreed rate on their deposits. The total resources of 
these banks in 1918 were nearly a billion and a quarter. 
In some states^ as in New York, "savings and loan asso- 
ciations" are organized with powers and functions different 
from savings banks. By Act of Congress (June 25, 1910, 
Ch. 386; 36 Stat. L. 814), a Postal Savings System was 
instituted. Deposits are receivable at post offices, in sums 
not less than one dollar and not exceeding in any month 
$100. Xon-negotiable savings certificates are issued, which 
bear interest at two per cent., if the money is left for a 
year or more. 

437. Investment Bankers. — These have been described 
as "middle men pure and simple." Their business does not 
consist in accumulating a banking fund, subject to ordinary 
checking, but in promoting and financing new enterprises. 
They do keep open accounts with their clients and use their 
own funds in buying securities, but their chief function is 
that of interesting their clients and the public in the pur- 
chase of the stocks and bonds of business enterprises which 
they have examined and approved. Ordinarily, however, 
they do not guarantee these investments, nor hold them.- 
selves out as liable for losses sustained therefrom. J. P. 
Morgan & Co., Ivuhn, Loeb & Co. and James Speyer & Co. 
are representatives of this class. 

438. The commercial bank. — This is the commonest 
form and tlie one which plays the most important part in 
modern business life. While often distrusted and criticized, 
commercial bankers serve rather than rule the business in- 
terests of their communities. They relieve the depositor 
from the risk of keeping his money in his house, or store, 
or office. They enable him to make payments to his cred- 
itors in checks instead of coin or currency, to his great 
convenience. They use the deposits gathered from their 
patrons in making loans to those who have need of borrow- 
ing money and thus promote business activity. At times 



BANKS AND BANKING 305 

they issue bank notes or bills thereby adding to the volume 
of the currency. 

Because of these functions, banks have been classified 
as (1) banks of deposit, (2) banks of loan and discount 
and (3) banks of circulation. But the classification is not 
very helpful, for a commercial bank never limits itself to 
receiving deposits. Its own profits and its greatest service 
to the community come from its loans and discounts. 

439. Deposits,. — The bank supplies each depositor with 
a pass book and deposit slips. When he has occasion to 
make a deposit, he enters on a slip the various items, ac- 
cording as they are bank bills, coin, checks, notes of indi- 
viduals or coupons, and presents these with his pass book to 
the receiving teller, who enters their total on the book to 
the credit of the depositor. If he is at a distance from the 
bank he may send his deposits by mail. 

He is allowed to draw checks at once against cash which 
he has deposited, as well as against the proceeds of notes 
discounted for him. But against checks, drafts, notes or 
other items which the bank receives for collection, he is not 
allowed to draw until they are collected, and he is often 
advised by a printed notice in his pass book that these are 
received for collection at his risk and expense. In other 
words the bank acts as his agent in making collection of 
these items and does not buy them. 

The pass book should be presented monthly to be bal- 
anced and returned to him, with the cancelled checks as 
vouchers for payments made by the bank on his account. 
Some banks prefer to send to each depositor a monthly 
statement of his account, with the cancelled vouchers. 

As soon as a deposit is made its ownership passes to the 
bank and the depositor is only a creditor for the amount, 
with the right to check it out at his pleasure. 

440. Loans and discounts. — These are made by the bank 
not only to its depositors or regular patrons, but to out- 



306 ESSENTIALS OF BUSINESS LAW 

siders. The simplest transaction is when a person applies 
for a loan^ gives his approved promissory note and receives 
the money. If the note is for $1,000, payable at a fixed 
time, without interest, he receives the $1,000 less the dis- 
count for that period. In other words, the bank receives 
interest in advance on the loan, and thus gets a little more 
than the legal rate of interest without subjecting itself to 
the charge of exacting usury. 

Discount, in a broader sense, applies to transactions 
where a bank buys promissory notes, bills of exchange or 
other negotiable paper from the owner, paying him pos- 
sibly less than the face value. In this sense it is used in 
the Federal Eeserve Act when authorizing "discount opera- 
tions" by banks, and defining paper eligible for rediscount. 

441. Interest and usury. — Commercial banks do not pay 
interest on deposits as a rule, because they hold themselves 
in readiness to pay their depositors on demand. Some do 
pay interest on money which is to be left for a prescribed 
time, e.g., three months or longer. In such cases the inter- 
est is generally below the legal rate, and the bank gives a 
certificate of deposit for the amount, thus distinguishing it 
from general deposits. 

In commercial centers, where depositors often keep large 
sums in their accounts, banks pay interest on credit bal- 
ances above a specified sum, e.g., $1,000. This operates as 
=an inducement to the depositor to keep as large a balance 
as possible, while it enables the bank to count on having a 
fund which will not be checked out. 

One who knowingly takes more than the legal rate of 
interest^ upon a loan is guilty of usury and subject to dif- 
ferent penalties in the different States. These vary from 

* The maximum rate varies from Q%, as in New York, to 
12<^ as in Connecticut. In several States, no maximum is fixed, 
and parties may agree upon any rate. In other words, usury laws 
are abolished in those States. 



BANKS AND BANKING 307 

the forfeiture of the excess above legal interest to that of 
the total loan. The "usury taker may be liable also to a 
criminal prosecution. National banks are allowed to take 
the interest fixed by the laws of the State, Territory or 
District where they are located. If they take more they 
forfeit the entire interest and are liable to an action for 
twice the amount paid if the action is brought within two 
years from the time of the usurious transaction. 

In some States as in New York (General Business Law, 
§ 374), corporations are denied the right to set up the 
defense of usury. In other words, the usury law is repealed 
as to borrowers who are corporations. 

442. Checks. — The commercial bank supplies its depos- 
itors with check books and engages to cash their checks 
drawn against their accounts. If it breaks this engagement, 
while the depositor has sufficient funds to his credit, it is 
liable in damages to him, and juries have awarded very sub- 
stantial sums in such cases. A depositor who knowingly 
gives a check without funds to meet it, may be liable in 
fraud, and, by a recent New York statute (L. 1918, Ch. 
314), may be liable criminally. Wliile the bank promises 
its depositor to honor his checks, it is under no such engage- 
ment to the holder. It is not liable to him until it certifies 
the check. At least tliat is the prevailing rule ; and the bank 
can refuse to cash an uncertified check without liability to 
the holder. Hence it may, and often does, require him to 
do things as a condition of cashing checks, which he is not 
legally bound to do, such as indorsing a check payable to 
bearer. If the drawer of a check revokes it, that is, notifies 
the bank not to pay it, the bank may safely, and should, 
obey the countermand. Of course, the drawer will be liable 
on the check to a holder who has taken it for value and in 
good faith. 

In case the owner of a check loses it, he should promptly 
notify the bank on which it is drawn of its loss and request 



308 ESSENTIALS OF BUSINESS LAW 

that it be not cashed. It is better not to draw checks pay- 
able to bearer, nor to indorse them in blank, unless they are 
to be presented immediately for payment, so as to prevent a 
finder or thief from passing title to them. 

443. Forgery and alteration. — The bank requires the 
depositor to leave with it specimens of his signature, and is 
bound to ascertain, before cashing a check, whether the 
drawer's signature is genuine. If it cashes a check with a 
forged signature, it is not entitled to charge it against the 
depositor. If it cashes a check with the forged indorsement 
of the payee it cannot charge it against the drawer's ac- 
count, for the check has not been paid in accordance with 
his direction. In England, this rule has been changed by 
statute, and the loss from a forged indorsement falls on the 
drawer of the check and not on the bank, if it pays "in 
good faith and the ordinary course of business." Such is 
the rule on the continent of Europe. 

If a check is altered, after its issue by the drawer, the 
bank, upon cashing it, is not entitled to charge it against 
the depositor, unless the latter's fault has contributed to the 
alteration. In case the alteration consists in the erasure of 
words or figures and the substitution of different ones, no 
fault can be ascribed to the drawer of the check. If, how- 
ever, he has left spaces in connection with the figures and 
words, so that the forger can alter the amount by filling in 
these spaces, the bank may be entitled to charge the altered 
check to the drawer's account. Such is the doctrine lately 
announced in the House of Lords, and by some of our 
courts. Other tribunals do not recognize a duty on the 
part of depositors to so fill up blank spaces as to make 
alteration impossible without erasure. All authorities agree 
that a drawer, who delivers his check with spaces for figures 
and words entirely blank, is liable thereon to a holder in 
due course and to his bank upon cashing it, for whatever 
amount is filled in. 



BANKS AND BANKING 309 

A careful person, in drawing a check, will draw his pen 
through printed words which differ from those which he 
writes; and will see that the sum denoted by words is the 
same as that denoted by figures. If, however, he fails to do 
this, it is settled that written provisions prevail over printed 
ones, and that the sum denoted by words is the sum pay- 
able. Mistakes in the language or figures of a check may 
be corrected by the drawer before its issue, but it is better 
to destroy such a check and draw one which does not have 
corrections. 

444. Presentment of checks. — In the ordinary course of 
business, a bank will receive from its depositors checks on 
other banks, and they will receive checks on it. In small 
towns the receiving bank collects directly from the drawee 
bank, making presentment not later than the day following 
the receipt of the check. If the check is on a bank in a 
different place, it should be sent for collection by mail on 
the day following its receipt. This practice is based on the 
mercantile understanding that checks are drawn not to 
remain indefinitely in circulation, like bank notes or bills, 
but for prompt presentment. Hence, if it is not presented 
promptly, the drawer will be discharged from liability 
thereon to the extent of loss caused by the delay. 

445. Clearing" houses. — In large commercial centers, 
banks present checks through a clearing house; and, in 
New York City, checks often bear on their face the mem- 
orandum, "payable through the New York Clearing House." 
This association is composed (1918) of fifty-nine banking 
institutions, which present daily at the clearing house, 
checks, which each has received, to be set off against checks 
drawn on the bank presenting them. If the balance is 
against a particular bank, it pays that amount; if the bal- 
ance is in its favor it receives it. Thus, instead of each 
bank cashing the checks drawn on it, and collecting cash 
from the other banks for checks it holds against them, only 



310 ESSENTIALS OF BUSINESS LAW 

the balances are paid. These, during the last ten years, 
have varied from four to ten per cent of the total clearings. 
It will be observed that a local clearing house results in a 
great saving in the use of currency. Indeed, checks and 
clearing-houses obviate the use of currency (i.e., coin and 
paper money) to such an extent that it has been styled "the 
small change of commerce" in this country. And yet the 
total currency in actual circulation (Dec. 1, 1918) amount- 
ed to nearly six billions. 

The use of cash in settling balances at clearing houses 
is virtually dispensed with, in Federal Eeserve Centers, 
where the members keeping accounts with the Federal Ee- 
serve Bank are allowed to have their daily balances credited 
or debited to such -accounts. 

446. State banks. — Until the National Bank Act of 
1864, nearly all banks in this country were organized and 
controlled by the States. State banks are still a large con- 
stituent of our banking system, numbering (1918) more 
than 19,000 institutions and having resources of more than 
sixteen billion dollars. Some of them are trust companies; 
that is, they are empowered by law to act as executor, ad- 
ministrator, trustee, receiver or guardian of estates, and to 
hold and care for property under deeds of trust and as 
bailees. This function, in connection with that of regular 
banking, has proved so popular and remunerative that Con- 
gress has recently provided for adding to national banks 
trust company departments. The assets of this part of their 
business are to be segregated from those of the bank proper, 
and its records are to be separate from the bank records. 

The States, as a rule, have admirable laws on the sub- 
ject of banking, and their banks are subject to careful and 
efficient supervision. In his report for 1918, the New York 
Superintendent of Banks calls attention to the soundness 
of these institutions and declares : 

"The strength of the State banking system in this State 



BANKS AND BANKING 311 

has been due to its adaptation to local needs and changing" 
conditions, to the fact that it has sought to promote intel- 
ligently the business and commerce of the State and its 
great metropolitan port, and to aid the nation in assuming 
its proper place in international commerce/' 

447. National banks. — These are organized under an 
act of Congress passed during the Civil War and frequently 
amended since. (Ch. 106, L. 1864; 13 Stat., L. 99.) They 
are granted "all such incidental powers as shall be necessary 
to carry on the business of banking; by discounting and 
negotiating promissory notes, drafts, bills of exchange and 
other evidences of debt; by receiving deposits; by buying 
and selling exchange coin and bullion; by loaning money 
on personal security; and by obtaining, issuing and circu- 
lating notes.'' 

The number of national banks in 1918 was 7,688 and 
their aggregate resources were a little more than eighteen 
billion dollars. Their circulating notes amounted to about 
seven hundred millions, in denominations of $5, $10, $20, 
$50, $100, $500 and $1,000. They are not a legal tender, 
but are receivable for all public dues except customs and 
are redeemable in "lawful money" at the Treasury or the 
bank issuing them. Lawful money is defined as including 
all that is a legal tender. 

448. Farm loan 'banks. — National banks, until recently, 
were not allowed to loan on the security of real estate mort- 
gages. Most commercial banks consider such security un- 
desirable, because not easily converted into money in times 
of financial stringency. They prefer the more liquid forms 
of personal credit and of saleable stocks and bonds. Ac- 
cordingly, Congress has provided for a Farm Loan Board 
(July 17, 1916, Ch. 245, 39 Stat., L. 360), which has organ- 
ized twelve farm loan banks having a capital of sixteen mil- 
lion dollars. These have made loans (Oct. 31, 1918) to 
the extent of 140 millions, for terms varying from 5 to 40 



312 ESSENTIALS OF BUSINESS LAW 

years and at an interest rate not exceeding six per cent. 
Farm loan associations are organized to assist farmers in 
taking advantage of this system which is now in operation 
in every State. The Secretary of the Treasury, in his 
report for 1918, declares that ^'it has constituted the great 
governmental agency for financing the basic industry of the 
United States — that of agricnltnre." 

449. Federal reserve banks. — These are organized un- 
der the Federal Eeserve Act, approved Dec. 23, 1913. They 
are twelve in number, located in Boston, New York, Phil- 
adelphia, Cleveland, Eichmond, Atlanta, Chicago, St. Louis, 
Minneapolis, Kansas City, Dallas and San Francisco. 
There are fifteen branches in other cities. This system has 
two main purposes, to unify as far as practicable the finan- 
cial resources of the country and to provide an elastic cur- 
rency. 

^National banks are virtually forced to become members 
of the system, and strong inducements are held out to State 
Banks to enter. The latter, however, remain subject to 
State laws and State banking departments, but must com- 
ply with certain requirements of the Federal Act and sub- 
mit to certain examinations and regulations of the Federal 
Eeserve Board. About nine hundred State banks have 
entered the system (1918). 

Each reserve bank must have a capital of four millions. 
The assets of the banks having membership in this system 
total (in 1918) more than five billion dollars and comprise 
eighty per cent of the commercial banking resources of the 
United States. 

Circulating notes are issued by the Board to meet the 
business demands as reported by the reserve banks. Each 
bank is allowed, also, to take out a limited amount of notes, 
upon its purchase of U. S. bonds. Notes of the first class 
are called Federal Eeserve notes, are issued in denomina- 
tions of $5, $10, $20, $50, $100, $500, $1,000, $5,000 and 



BANKS AND BANKING 313 

$10,000. They amounted (Dec. 1, 1918) to nearly three 
billion dollars^ and are redeemable at the U. S. Treasury 
or at any Federal Eeserve bank. Notes of the second class 
are called Federal Eeserve bank notes ; are issued in denom- 
inations of $1, $2, $5, $10, $20, $50, $100, $500 and $1,000; 
amounted (Dec. 1, 1918) to about ninety-seven millions, 
and are redeemable at the Treasury or at the bank of issue. 

The Federal Reserve Board reports that these notes are 
now the most important constituent of our circulating 
medium, responding promptly and naturally to currency 
requirements, and giving to our whole currency an elasticity 
never before possessed. The Board has the power to control 
discount rates and these can wield a powerful influence over 
the money market. It points with satisfaction to the fact 
that there has not been a time since the system went into 
operation, when business men entitled to credit could not 
obtain loans from banks at three to six per cent. The sys- 
tem, the Board declares, is the ultimate resource of the busi- 
ness and financial community — the nation's banking re- 
serve. It aids the government in its financial operations, 
while maintaining sound and solvent banking conditions. 
The Federal Eeserve Bank of New York reported net earn- 
ings of about 100 per cent on its capital of $20,820,000. 
After paying six per cent to its stockholders, and passing 
to its surplus account enough to increase that account to 
its limit (40 per cent of the capital) it paid about $10,- 
000,000 to the government as a franchise tax. 

450. International banking. — The Federal Eeserve Act 
authorizes the establishment of branches in foreign coun- 
tries by our national banking associations. These may act 
as fiscal agents of the United States. During 1918 our 
exports exceeded our imports by nearly three billions: our 
government advanced to foreign governments more than 
seven billions, and this country held one-third of the gold 
monetary stock of the world. Thus we are becoming the 



314 ESSENTIALS OF BUSINESS LAW 

creditor nation of the world. With our financial system 
unified as it now is; with our immense natural resources; 
with the vast increase in onr shippings and with our indus- 
trial energy and enterprise, it would seem that this country 
must play an increasing if not dominant part in interna- 
tional finance. Heretofore, London has been the "clearing 
house of the world.''' The balances arising in international 
trade have been adjusted there. But if present conditions 
continue, those balances will be in favor of this country, and 
'New York will take the place of London as '^a central re- 
serve agent and adjuster of reciprocal liabilities of nations." 



APPENDIX 



Page 34, Note 1. 

Although an entirely satisfactory definition of tort has not been 
formulated, it may be fairly described as " a breach of duty imposed 
by municipal law for which a private action for damages can be sus- 
tained. " It is to be distinguished from a breach of contract on the one 
hand, and from a crime, or breach of duty to the State, on the other. 
A person who breaks his contract, without excuse, wrongs the other 
party to the contract, but he does not commit a tort, for the duty 
which he violates is one that was imposed upon him by his agree- 
ment. The duty violated by an act or omission which amounts to a 
tort is a duty imposed by a rule of law. Typical instances of tort 
are assault and battery, false imprisonment, trespassing upon real 
estate, or converting to one's use the personal property of another. 

At times the law imposes upon a party to a contract a duty very 
similar to that which the contract imposes. An innkeeper or a 
common carrier is an example. When such a party breaks his con- 
tract lie also violates his legal duty, and may be sued either for his 
breach of contract or for his tort. 

Some acts are crimes as well as torts. A person who attacks and 
injures another without lawful excuse or justification, is liable to a 
private action in tort for damages to the Oh. injured, and is also 
liable to public prosecution by the State for the crime of assault and 
battery. 

Page 134, Note 1. 

Perhaps this statement needs some elucidation. A promises to 
let B use his horse for a day without compensation. There is no 
contract for a bailment of the horse, because L furnishes no consid- 
eration for A's promise. If, however, Jl, in return for A's promise 
and at his request, promises to be absolutely responsible for the 
safety of the horse while in his possession, no matter what accident 
may befall the beast, he assumes a liability which the law did not 
impose upon him — he sustains a detriment — and thus furnishes a 
consideration for A's promise. The parties have made a binding 
contract for a bailment. 

315 



PKACTICE PROBLEMS 



CHAPTER III 

§ 1. Pages 33-56 

1. It is agreed between A and B that the former shall 
visit the latter during" the first three days of the following 
week. Without excuse A breaks the agreement. Has B a 
right of action against him for breach of contract? 

2. A merchant sends a circular to his patrons containing 
a list of articles with their respective prices. One of the 
patrons mails to the merchant the price of one of the articles 
and orders it to be sent to him. Although the merchant has 
the article in stock, he returns the money and refuses to send 
the article. Has he broken a contract with the patron? 

3. A sees a basket of peaches in B's store marked to sell 
at $2. He takes the basket and tenders the price to B. Has 
a contract been made between them? If it has, what con- 
stituted the offer, and what the acceptance? 

4. A agreed to work for B during the following week for 
such wages as should be deemed right. Did the agreement 
amount to a binding contract? 

5. A offered certain property to B for $1,000 cash, pay- 
able at A's house. B wrote : " I accept your offer. The money 
is on deposit to your order in the First National Bank of X." 
After receiving the letter, A sold and delivered the property 
to C. Has A broken a contract with B? Did A's sale of 
the property operate as a withdrawal of his offer to B ? 

6. A offers a stack of hay to B at $12 a ton. Six months 
thereafter B accepts the offer. Do such offer and acceptance 
constitute a contract? 

317 



318 ESSENTIALS OF BUSINESS LAW 

7. A writes B that he will sell him a carload of certain 
grain at a named price, provided he receives an acceptance 
from B within forty-eight hours. B mails an acceptance of 
A's offer to him in time to reach him within the forty-eight 
hours, but the letter of acceptance is lost in the mails. Has 
a contract been made ? 

8. X signed and handed to B the following writing : " I 
hereby promise to pay B $500 one year from January 7, 1905. 
X (Seal)." X refused to pay the money, and when sued 
upon the instrument, admitted that he wrote his name on the 
paper opposite a postage stamp which had been aiSxed at 
the place marked " (Seal)," and then handed the instrument 
to B, but declared he never owed B anything. Assume that 
the facts are as he states them, is he bound to pay the $500 
to B? 

9. Suppose, in the foregoing case, X had handed the in- 
strument to C with instructions to turn it over to B in case 
the latter was elected to a certain office; that B was never 
elected to the office, but that he took the instrument from 
C's possession. Can B enforce the instrument against X ? 

10. Y requested M to give up the habit of chewing to- 
bacco. M said he would for five years if Y would promise 
to pay him at the end of that time $500. Y so promised, and 
M gave up the habit for the five years. Is Y under a contract 
duty to pay the $500 to M ? 

11. B is knocked senseless and his arm broken by an 
accident. C hires a conveyance and takes B to a surgeon 
before the latter regains consciousness. Is B under a con- 
tract duty to reimburse C ? 

§ 2. Pages 57-66 

1. A citizen of France who is temporarily in Xew York 
contracts to do certain work for a citizen of Xew York for 
certain wages. After the services have been rendered, the 
'New Yorker refuses to pay the wages. Has the Frenchman 
a right to enforce his claim in a ISTew York court? 

2. Would it matter that the services were rendered and 



PRACTICE PROBLEMS 319 

the suit brought while France and the United States were at 
war? 

3. X, a married woman, borrowed $500 from B and gave 
her promissory note therefor. Could B maintain an action 
upon it against X (a) at common law, or (h) under modern 
statutes ? 

4. Y, who was sixteen years old, agreed to pay $50 for 
a sewing machine, which was thereupon delivered to her. The 
next day she told the seller that she would not keep the ma- 
chine, and requested him to take it back. He refused to do 
this, and sued her for the price, (a) Can he recover? (h) 
Would your answer be different if Y had used it for a month 
before tendering it back? (c) Would it be different if Y had 
sold the machine to a third party before suit was brought by 
the seller? 

§ 3. Pages 66-70 

1. A requests B to knock down C, and promises to pay 
him $50 for doing it. B knocks down C, and upon A's refusal 
to pay the $50 sues him for it. Can he recover? 

2. X and Y are the respective owners of two lines of boats 
between Albany and New York. X agrees to sell his line to 
Y for a specified price, and withdraw from all competition 
with Y. Y tenders the price. X refuses to perform his agree- 
ment. Can Y maintain an action against X? 



§ 4. Pages 70-86 

1. A has two horses of very similar appearance, but horse 
X is worth $1,000, while horse Y is worth but $100. B, who 
knows the horses, asks A at what price he will sell the horse 
at which B is then looking. A, supposing B is looking at 
horse Y, answers $100. B pays the money. Thereafter, A, 
discovering that B was looking at horse X and claims that 
horse, refuses to let B have him. Is B entitled to horse X ? 

2. M, in paying a debt to N, hands over with other money 
a. penny. Because of the rarity of this issue the penny is 



320 ESSENTIALS OF BUSINESS LAW 

worth $5. Is N under any legal obligation to return the coin 
upon M's tender of another penny? 

3. A was looking at B's hops with a view to buying them. 
He said : '' If any sulphur has been used in drying these hops, 
I will have nothing to do with them." B assured him that 
no sulphur had been used, and A agreed to take the hops at 
a specified price. In fact, sulphur had been used on a small 
part of them, but B had forgotten this fact when he gave the 
assurance. Is there a binding contract between A and B? 

4. X offers his horse to Y for $150, who accepts the offer, 
pays the price, and takes the horse. Because of disease, the 
horse was worth but $50, and this was known to X. Y made 
no inquiry about the horse's condition, and X did not disclose 
his knowledge. Has X practiced legal fraud upon Y? 

5. Would your answer be the same if Y had asked X 
about the horse's condition, and X had not answered the 
question, but had diverted Y's attention by telling a story? 

6. A offers a flock of sheep to B at a specified price, as- 
suring B that he can make enough from the wool and lambs 
from the flock the next summer to pay the price. A knows 
that this is impossible, but B believes the statement, and is 
induced by it to buy the flock. The proceeds from the wool 
and lambs amounted to less than half the price paid by B. 
Has he been legally defrauded by A ? 

7. By a fraudulent misstatement of fact X induces Y to 
sell and deliver certain property to X on credit. Before Y 
discovers the fraud, X gives the property to Z. Is Y en- 
titled to take the property from Z ? Would your answer be 
the same if Z, with knowledge of all the facts, had paid full 
value for the property to X? 

8. M induces X to sell and deliver certain property to the 
former. for half its value by threatening to shoot him if he 
does not. Is the sale legally valid? Would your answer be 
the same if the threat had been to burn X's house? or to 
whip him? or to carry off N's wife? or his child? or his 
servant ? 



PRACTICE PROBLEMS 321 

§ 5. Pages 86-89 

1. A agrees to do a certain amount of typewriting for B. 
Being unable to perform his agreement, A sends C to do the 
work. Is B bound to accept C's services? 

2. If, after making the contract referred to in the last 
question, B had sold his business to C, could C compel A to 
perform his agreement or pay damages? 

3. X contracts with a railway company to grade fifty miles 
of its track. He sublets the work to A, B, C, J), and E, each 
of whom is to grade ten miles thereof, (a) Has X broken 
his contract with the company? (h) Has A, B, C, D, or E 
any contract right against the company? 

§ 6. Pages 91, 92 

1. A agrees to act as bookkeeper for B for a year for $500. 
Later A assigns this contract to C, who presents himself to 
B and offers to act as bookkeeper. B refuses to have any- 
thing to do with C. Has the latter any rights against B ? 

2. X owes Y $100. Y assigns his claim to Z. Can Z 
maintain a lawsuit in his own name against X ? Could he at 
common law? 

3. Suppose in the foregoing case X had paid the $100 to 
Y after the assignment, and before suit by Z. Would such 
payment be a defense to Z's suit? 

4. Suppose, when the debt was assigned, Y was owing X 
$50. What are Z's rights against X? 

§ 7. Pages 93-100 

1. A has sold and delivered a horse to B, for which the 
latter has agreed to pay $300. Later he pays to A $150, who 
gives to B a writing which recites that this is in full satis- 
faction and discharge of B's debt to A. Can A recover the 
remaining $150? 

2. .Suppose in the foregoing case B had given his check 
for $300, and A had handed B a receipt in full ; that the check 



322 ESSENTIALS OF BUSINESS LAW 

was duly presented, but the bank on whicli it was drawn re- 
fused to pay it. Could A sue B for the original debt ? 

3. X agrees to sell two chairs to B for $50 each. One had 
been the property of Benjamin Franklin; the other had been 
bought by X from an ordinary furniture dealer. If X refuses 
to deliver the chairs, what are B's rights against him? 

4. M agrees to buy and pay for 1,000 cattle of a certain 
description, to be delivered in weekly installments of 100 by 
IvT, each installment to be paid for on delivery at an agreed 
price per pound. M refused to accept the third installment 
or to pay for them. Has N a right to refuse to deliver any 
more cattle, and to sue at once for damages? 



CHAPTER IV 
§ 1. Pages 101-114 

1. A, professing to be B's agent, offers certain property of 
B's to C at a stated price. C accepts the offer, pays the price, 
and takes the property. In fact, A was not B's agent. Can 
C hold the property against B? Would your answer be the 
same if it appeared that A paid to B the money received from 
C, assuring B at the time that it was his money, and that 
he was paying it upon a debt he owed B? 

2. X, an infant, employs Y as his agent. What is X's 
liability upon contracts made on his behalf by Y? What 
would be your answer if X were of full age and Y an infant ? 

§ 2. Pages 114-119 

1. A goes to Europe, leaving B to manage his business, 
B hires X to do certain work in the business for $500. Is A 
under a contract obligation to X? Is B? 

2. Suppose A had told B that he must not hire X for this 
tvork, would your answer be different ? 

3. Suppose that B^ while doing the work^ runs against C 



PRACTICE PROBLEMS 323 

and knocks him down, injuring- him severely. Can C recover 
damages from A? Can he from B? Would either answer 
be different if it appeared that B knocked C down solely be- 
cause he hated C ? 

4. A jumped into a freight car to steal a ride. After the 
train started, a brakeman discovered him and threw him out 
while the train was moving, badly injuring him. Is the rail- 
road company liable in damages to A? 

5. X hires Y to make certain repairs to a building in ac- 
cordance with certain written specifications. While doing the 
work Y negligently injures Z. Has the latter a cause of 
action against X? 

§ 3. Pages 119, 120 

1. A buys a horse of B and agrees to pay $200 for it. 
After the purchase, C notifies him that B was acting as C's 
agent in selling the horse, and B admits this. Can C recover 
the price from A? 

§ 4. Pages 120-122 

1. X honestly believes that he has authority from Y to 
sell a certain wagon. He sells it to Z after assuring the lat- 
ter that he is Y's agent. The fact is that Y never employed 
X as agent. Hence he repudiates the sale and retakes the 
wagon from Z. What are the latter's rights against X ? 

2. B sues A on a contract under seal, signed " A, agent." 
A defends on the ground that the contract is that of A's prin- 
cipal, C. Is the defense good? Would it be if no seal had 
been affixed to the contract? 

§ 5. Pages 122, 123 

1. In the case last stated, could A maintain an action in 
his owm name against B if the latter had broken the con- 
tract? In such a suit, would it be a defense for B if he 
could show that A's principal, C, had broken the contract? 



324 ESSENTIALS OF BUSINESS LAW 

§ 6. Pages 123, 124 

1. A is B's agent to collect a debt from C. He finds 
property in C's possession which he takes for the debt. It 
belongs to D, who sues A fo.r it and recovers its value from 
him. Is B bound to reimburse A for the amount thus re- 
covered from him by D ? 

2. X, who is Y's agent for the sale of certain property, 
learns facts which indicate that the property will soon rise 
in value. Without disclosing these facts to Y, he sells the 
property, at a price theretofore fixed by Y, to Z, who has 
agreed to divide the profits to be made out of the property 
with X, and does divide them with him. What are Y's rights 
against X? 

§ 7. Pages 124-126 

1. A and B were hired by X to pile lumber. While at 
work A carelessly dropped a board on B, breaking his arm. 
Has B a right of action against X? 

2. A and five others we.re engaged to work as the train 
crew on defendant's railroad. The train superintendent sent 
the train out with A and only four others. This number was 
insufficient for the safe management of the train and A was 
injured through the negligence of one of the crew. Has he a 
right of action against the defendant? 

3. A and B were working for X in a building where there 
were electrical wires of a high voltage. X depended upon B 
to inspect the wires and keep them insulated. Through B's 
negligence the wires became dangerous, resulting in serious 
injury to A. Has he a cause of action against X? 

4. A and B were fellow servants of X, who sent B to buy 
and instal an emery wheel. The wheel which B installed was 
so defective that it exploded and injured A. Has he a right 
of action against X? 

5. To what extent have Employers' Liability Acts modified 
the fellow-servant rule? 

6. What is the purpose of Workmen's Compensation Acts ? 
Was the constitutionality of the English Act questioned ? On 



PRACTICE PROBLEMS 325 

what ground was the first Compensation Act in N. Y. declared 
unconstitutional? Why was the second Act declared consti- 
tutional? What benefits have accrued to employers as well as 
employees from these Acts? Is a contract between a servant 
and his master that the former will not enforce his rights 
under the Act, binding on the servant? How can the master 
protect himself from loss, in cases where he has to pay dam- 
ages to the servant for accidental injury? 



CHAPTER V 
§ 1. Pages 127-130 

1. A borrows B's wagon for the day. Is he under a con- 
tract obligation to return it to B ? If so, at what time ? 

2. A postmaster demands from the addressee of a letter 
two cents on the ground that it is overweight. It is not over- 
weight. What are the addressee's rights against the post- 
master? 

3. Y borrowed a ton of hay from X, promising to return 
a like quantity after he had cut his hay crop the following 
summer. All of Y's hay crop was destroyed by fire after it 
was put into his barn. What are X's rights against Y? 

4. The same fire destroyed X's plow, which Y had bor- 
rowed the day before for a week. What is Y's liability for 
the plow? 

§ 2. Pages 130-132 

1. A undertakes to repair a suit of clothes for B without 
charge. What degree of care and skill must A exercise? 
What effect has A's death on the transaction? 

2. X asks Y to carry a particular package for him to a 
certain place, and Y assents. Later X puts into Y's wagon 
another package without Y's knowledge or consent. There- 
upon Y took both packages from the wagon and left them 
where the wagon was standing when X put them into it. 
Both are lost. What is Y's liability to X ? 



326 ESSENTIALS OF BUSINESS LAW 

§ 3. Pages 132-134 

1. B. without charge let A take his horse to drive from 
X to Y. A drove him from X to Z. While at Z the horse 
was killed by lightning. What is A's liability to B ? 

2. A promises to work for B the following day without 
charge, but breaks his promise. What rights has B against A ? 

§ 4. Pages 134-136 

1. A promises to carry B from X to Y for an agreed price. 
B tenders the price, but A refuses to carry him as agreed. 
What is A's liability to B ? 

2. A lets his carriage to B for a week at a stipulated price. 
One of the axles was cracked, but A did not know it. While 
B was using the carriage the axle broke, and he was thrown 
out and injured. What are his rights against A? 

§ 5. Pages 136-139 

1. X had a paper showing that he was entitled to a pen- 
sion of $1,000 from the United States; also a promissory note 
by Y to X's order for $500. He borrowed $1,500 from Z and 
turned over these papers to Z as security for the loan, and 
failed to pay the loan. What are Z's rights to the note and 
to the pension paper ? 

2. A pledges a cow to B for a debt. B milks the cow 
while in his possession, and receives for the milk $20 over 
and above the cost of pasturing and caring for the cow. Is 
A or B entitled to this profit? 

§ 6. Pages 140-144 

1. A buys a postage stamp, puts it on a letter duly ad- 
dressed and places the letter in a mail box. Does this consti- 
tute a contract of bailment? What is the liability of the 
U. S. Government for the loss of the letter by its postal 
agents? What is the liability of the postal clerk or carrier 
who loses or destroys it? 



PKACTICE PEOBLEMS 327 

2. What arrangements has the Government made for reg- 
istering mail ? 

3. For what amounts may parcel post packages be insured, 
and what is the expense of such insurance ? How does the 
insured party get his indemnity? What is the fee for 
" C.O.D." packages by parcel post ? 

4. When the U. S. sues the bondsman of a postal employee, 
who has stolen mail matter, and thus broken his bond, how 
much is it entitled to recover? How much is it entitled to 
recover from the employee? Is it entitled to keep all that it 
recovers ? 

§ 7. Pages 144^152 

1. An innkeeper turns away a guest because he dislikes 
him, and for no other reason. Has the excluded guest a right 
of action against the innkeeper? 

2. An innkeeper received as a guest one whom he knew 
had scarlet fever, and from whom another guest contracted 
the disease. What is the innkeeper's liability to the second 
guest ? 

3. X is received as a guest by innkeeper Y. During the 
night masked burglars enter the inn, overpower Y and his 
servants, and rob X of his watch, his purse in which he had 
$1,000, and his clothing. What is Y's liability to X, {a) at 
common law, (&) under modern statutes? 

4. While A is a guest at B's inn the building is wrecked 
by an earthquake, and A and his property are badly injured. 
Has he a right of action against B for the damages? Would 
your answer be the same if the wrecking of the building and 
harm to A had been caused by negligent blasting on adjoin- 
ing property by M ? or by a mob who dynamited the inn ? 

5. X frequently stays at Y's inn under a special agree- 
ment that he shall pay by the week. Is he a guest or a 
boarder? 

6. Upon a guest's failing to pay his bill, the innkeeper 
took his trunks. One of them belonged to a third person. 
Has the innkeeper the right to hold this trunk as well as the 
others until the bill is paid ? 



328 ESSENTIALS OF BUSINESS LAW 



§ 8. Pages 152-154 

1. X, a lad of sixteen, hires a bicycle for a week's ride. 
Instead of riding it, he takes the wheels out of the frame 
and uses them for a totally different purpose. At the end of 
the week he returns the bicycle and refuses to pay for its 
use. What rights has the owner against him? 



§ 9. Pages 154-158 

1. X deposited a box of jewels with Y, agreeing to pay 
$1 a week for the storage. The box was stolen from Y's ware- 
house by a sneak thief. Must X or Y stand the loss? 

2. A grain warehouseman received 5,000 bushels of wheat 
from five different persons, and issued a warehouse receipt 
to each one for his 1,000 bushels. He delivered 4,000 bushels 
to the holders of four receipts, and sold the balance as his 
own property. What is his civil and what is his criminal 
liability ? 

3. How many States and Territories have adopted the 
tTniform Warehouse Receipt Act? 

4. A taxi-cab company receives and stores during certain 
months taxis for five dollars a month each. Is it a warehouse- 
man ? 

5. When does a railroad company's liability change from 
that of carrier to that of warehouseman ? What is its liability 
for parcels which it receives and checks at its parcel stands? 

6. A warehouseman gives a receipt for 100 barrels of sugar, 
by which he agrees to deliver to X or order. X indorses the 
receipt in blank and gives to a drayman, so that the latter can 
bring it to X's premises. The drayman, loses the receipt, and 
a finder presents it, gets the sugar and sells it to Y. Can Y 
hold the sugar as against X? 

7. What is the liability of one who indorses and sells the 
receipt ? 

8. Describe the warehouseman's lien, under the Uniform 
Act. 



PKACTICE PROBLEMS 329 

§ 10. Pages 158-170 

1. A holds himself out as a common carrier of all sorts 
of goods between X and Y. B brings him a barrel of apples 
and tenders a fair price for their carriage from X to Y. A 
refuses to carry them unless B will pay three times the sum 
tendered. What are B's rights against A? What would be 
your answer if A's refusal had been because he had a full 
load when the apples were tendered? 

2. A's goods were destroyed while in the wagon of a com- 
mon carrier by a gang of boys. Is the carrier liable to A for 
their value ? 

3. A ships a barrel of new cider by B's railroad. While 
in transit the cider ferments, bursts the barrel, and is wasted. 
What is the carrier's liability to A? 

4. An express company sends its wagon to B's house for 
a package to be transported to a distant place. While taking 
it from the house to the wagon, the company's agent is 
knocked down and the package taken from him. What is the 
company's liability to B? 

5. A railroad company receives a package directed to a 
place beyond its' line, and takes pay for the entire transporta- 
tion. The package was safely delivered by this company to 
another whose line extended to the place named, and was lost 
before reaching its destination. What is the liability of the 
first company? 

6. X tendered goods for transportation to a common car- 
rier, who refused to take them unless X agreed to exempt him 
from all liability for loss during their transit. Is the agree- 
ment binding upon X? 

7. What power has the Interstate Commerce Commission 
over the rates of common carriers ? Is its decision final ? 
What relief has the shipper who has been compelled to pay 
unfair rates ? Has the Commission the power to change intra- 
state rates? (See Houston & Texas Ry. v. U. S., 234 U. S. 
342, 34 Sup. Ct. Rep. 833.) 

8. How do the Carmack and Cummins amendments change 
the liability of the first carrier? (See Note on this subject in 



330 ESSEN^TIALS OF BUSINESS LAW 

Annotated Cases, 1915 B 80, to St. Louis & S. W. Ey. of Tex. 
V. Alexander, 227 U. S. 218, 33 Sup. Ct. Eep. 245.) 

9. In wliat respects do bills of lading- differ from dock war- 
rants and warehouse receipts, at common law? Does the term 
" bill of lading " apply to the same documents in Great Britain 
and on the Continent of Europe as it does here? 

10. State some of the particulars in which the Uniform 
Bill of Lading Act has changed the common law? Is a bill 
of lading which states that the goods are deliverable to John 
Smith negotiable? Can a thief pass a perfect title to a nego- 
tiable bill of lading- and to the goods which it represents? 

§ 11. Pages 170-175 

1. After X had seated himself in a railroad car he was 
seized with a fit. The conductor had him taken from the 
car and carried to a hotel near by. Two days thereafter X 
again boarded the car, and was ejected because his ticket had 
not been used within the time after its issue prescribed by 
the rules of the company. Has he a right of action against 
the railroad for either ejection? 

2. A passenger in an electric street car wa§ injured by the 
escape of electricity. What is the liability of the company 
for the injury? 

3. A passenger in a street car refuses to give up his ticket 
to a conductor because he cannot get a seat. The conductor 
forcibly takes the ticket from him. Has he any cause of 
action against the company? 

4. The conductor of a car saw a drunken passenger an- 
noying a lady passenger, but made no attempt to compel the 
fellow to stop. Has the woman a right of action against the 
railroad company? 

5. A passenger is injured through the negligence of the 
railroad's servants. He sues for damages, and the company 
shows that the ti'cket upon which plaintiff was riding con- 
tained a printed clause exonerating the company from all 
liability for the negligence of its servants. Can plaintiff 
recover ? 



PEACTICE PEOBLEMS * 331 

6. A passenger takes his dog into the car with him. The 
brakeman opens a window near by, whereupon the dog jumps 
out and is killed. Has the passenger a right of action against 
the company? 

§ 12. Pages 176-178 

1. A handed a telegram to the company's agent, who re- 
ceived pay for its transmission. Before it was sent, it was 
stolen from the office without the fault of the company, or its 
agents or servants. Has the sender a right of action against 
the company? 

2. A tenders a message to a telephone company in which 
he offers B $1,000 if he will kill C. The company refuses to 
send it. Has A a cause of action against the company ? 

§ 13. Pages 179-183 

1. When is a business to be classed as a public utility? 
Is the owner of a water or gasi supply, who supplies water or 
gas to those persons only whom he chooses as customers, sub- 
ject to the control of Public Utility Commission? (See De 
Pauw University v. Pub. Serv. Coms. 247 Fed. 183; Terminal 
Taxicab Co. v. Dist. of CoL, 241 U. S. 252, 256, — Sup. Ct. 
Eep. — .) Is a telephone company a public utility? (See 
Twin Yalley Tel. Co. v. Mitchell, 27 Okla. 388, 113 Pacific, 
914, Annotated Cases 1912 C 582, 38 L.K.A.N.S. 235 and 
State V. Noble Mutual Tel. Co., 268 111. 411, 109 N.E. 298, 
Annotated Cases, 1916 D 897.) 

2. What public utility business is subject to the control of 
the Interstate Commerce Commission? What is subject to 
State legislation and Commissions ? 

3. What is the basis of public utility legislation? Is a 
State law, which fixes the rates of a public utility business at 
so low a rate that it can operate only at a loss, valid ? 

4. To what extent may private business be controlled by 
State and Federal governments during war? (See Matter of 
Quinby v. Pub. Serv. Corns., 223 N. Y. 244, 119 N.E. 848.) 
In time of peace a State statute declares the marketing of 



832 ESSENTIALS OF BUSINESS LAW 

farm products is affected with a public interest. Does that 
make the business a public utility? 

CHAPTER VI 

Pages 184-190 

1. X cannot pay his debts as they fall due, but his prop- 
erty, at a fair valuation, is twice as much as his debts, (a) 
Can he become a voluntary bankrupt? (h) Can he be ad- 
judged an involuntary banl^rupt? 

CHAPTER VII 
Pages 191-205 

1. X pays to an insurance company $10 as a premium for 
insuring a particular house for $5,000. After this, but before 
an insurance policy is made out, the house burns. Can X 
recover the insurance money? 

2. Would your answer to the foregoing question be dif- 
ferent if it appeared that X had no pecuniary interest in the 
house ? 

3. A took out a policy of insurance on his ship, which he 
knew was unseaworthy, but did not disclose its condition to 
the insurer. It foundered at sea on the voyage for which it 
was insured. Can he recover upon his policy? 

4. Suppose he had taken out a policy on his life after 
answering accurately all questions put to him about his 
health and habits. He knew that he was suffering from a 
fatal disease, which was not referred to in the insurer's ques- 
tions, and which he did not disclose. Is the policy valid? 

CHAPTER VIII 

§ 1. Pages 206-213 

1. Is the following instrument a foreign or an inland bill 
of exchange ? 



PKACTICE PROBLEMS 333 

" $500.00 New York, December 1, 1907. 

On December 22, 1907, pay to the order of Jolm Smith, Five Hun- 
dred Dollars, value received, and charge the same to my account. 

James Henry. 
To 
Joseph Delong, 

100 Canal Street, Springfield, 111." 

2. Is the fojegoing paper a time draft or sight draft? 

3. Is the following instrument negotiable paper? 

No. 157. New York, December 1, 1907. 

The Corn Exchange Bank, University Branch, Broadway and 
113th Street. $500. 

William Blackstone has deposited in this bank Five Hundred Dol- 
lars, payable to his order on the return of this certificate properly 
indorsed. T. B. Johnson, Manager. 

(a) Is it a promissory note? (h) If so, who is the maker? 
(c) Who the payee? 

4. A promises in writing to pay B or order one hundred 
dollars' worth of merchantable lard at a specified time and 
place. B writes on the back of the paper " Pay to C," and 
signs this. Is C the indorsee of a negotiable promissory note ? 

§ 2. Pages 213-218 

1. A has $1,000 in B's hands. B promises to accept all 
drafts drawn on him by A up to that amount. A draws on 
B for $200, payable to the order of C, who thereupon ad- 
vances A $200. B refuses to accept the draft. Has C a right 
of action against B? 

2. What would be B's liability if, when C presented the 
draft to him, he had written his name on the paper? 

3. What would his liability be if he had written " Ac- 
cepted, payable when I am forty-five " ? 

4. Would C be bound to take such an acceptance? (a) If 
he did take it, what would be the effect upon A's liability on 
the draft? 



334 ESSENTIALS OF BUSINESS LAW 



5. X gives his negotiable promissory note to Y. The lat- 
ter makes no demand for payment at the time and place at 
which it is payable. Can he thereafter maintain a suit against 
X on the note? 

6. A gives his negotiable promissory note to B for $1,000 
without receiving any consideration therefor. B indorses the 
note and donates it to C. Can the latter recover from either 
A or B on the note? 

7. What would be the rights against A and B of a bank 
which had bought the note from B before it was due? 

8. Would the bank's rights against A be affected by its 
knowledge that A was an accommodation maker for B ? 

9. The payee of a promissory note agrees to sell it to X, 
and writes his name on the back. Before it leaves his pos- 
session, he dies. Is X the indorsee of the note? 

§ 3. Pages 218-225 

1. A promissory note made by X and indorsed by Y is 
payable at bank Z. Several days before it fell due it was 
mailed to the bank by the holder, but, through some mis- 
chance, the letter was laid aside unopened by the banker, 
who was not aware of the presence of the note in the bank 
until some days after it was due. Was the note duly pre- 
sented for payment ? 

2. A note payable at a certain bank on a given day is 
presented for payment five minutes after the close of banking 
hours, viz., 3.05 p.m. Is the presentment good ? 

3. Had no place of payment been specified, and had the 
paper been presented at the maker's residence at the same 
hour, would it have been good? 

4. The holder of a note payable at a bank is unconscious 
throughout the day on which it is payable. As soon as he 
regains his senses he has the paper presented for payment. 
Is the delay excusable? 

6. A promissory note is dishonored on December 1st. The 
holder gives personal notice of dishonor to the indorser on 
December 3d. Is the notice good, (a) if the holder and in- 



PKACTICE PEOBLEMS 335 

dorser live in the same place? (h) if they live in different 
places ? 

§ 4. Pages 225-231 

1. A is the owner of a promissory note payable to bearer. 
He mails it to B, who has promised to deliver it to C. B 
breaks his promise and sells it for full value to D, who knows 
nothing of B's relations to A. Can D hold the note against A? 

2. In the last case would your answer be the same if B's 
transfer of the paper to D had taken place after the note was 
due? 

3. A gave his note to B payable on demand. On the same 
day B indorsed it to C. Two weeks thereafter C indorsed 
the paper to D, who a week later duly demanded payment of 
A, and gave due notice of dishonor to B. (a) Is D a holder 
in due course? (h) Are B and C liable as indorsers to D? 

4. A gives his note to B for $200, the price of a horse 
sold to him by B, who represented the horse to be sound when 
he knew the animal was worthless. Before the note is due, 
B donates the note to C. Can C enforce it against A? 

5. What would be your answer: (a) If C had taken the 
note from B on account of a debt B was owing him? (h) li 
C had paid $100 for the note ? 

6. X, who is twenty years of age, gives his promissory 
note to B for goods purchased. B indorses the note to C. 
The paper is duly protested for nonpayment, and notice of 
dishonor given to B. C sues X, who pleads his infancy. 
What are C's rights against X and B respectively? 

7. A gives his check to B for $100. B alters the check 
so that it reads $1,000, and sells it for full value to C. What 
are C's rights against A? 

8. B finds a piece of paper with A's signature, and writes 
over it a promissory note for $500. He then sells it to C be- 
fore due for full value. Can the latter enforce it against A ? 



336 ESSENTIALS OF BUSINESS LAW 

CHAPTER IX 
Part 1. § 1. Pages 232-237 

1. B asks A to let him use A's name in a grocery business 
ivhich B is carrying on. A assents, and B puts over the door 
of his place of business the sign " B & A, Grocers." (a) Is 
A a partner of B? (h) AYhat is A's liability to creditors of 
the business? 

2. A, B, and C buy a race horse, have him branded as an 
ordinary ranch animal, and declare that he has never run a 
race. They do this as partners for the purpose of inducing 
D to wager $1,000 that his horse can beat theirs. The race 
is run, D's horse is beaten, and the $1,000 is paid over to A, 
who refuses to divide with B and C. What are their rights 
against A? 

3. A owns a hotel which he leases to B upon an agree- 
ment that they shall share equally the profits of the business 
carried on by B in the hotel. Are they partners? 

4. Two rival hotel keepers agree upon rates to be charged 
for rooms and board, and that each shall pay to the other at 
the end of the year one half of his net profits. Are they 
partners ? 

§ 2. Pages 237-240 

1. A and B enter into partnership upon the following 
terms : A puts in a stock of goods which he owns, valued at 
$1,000. B contributes neither money nor goods, but only his 
skill and experience, and A is to have two thirds of the 
profits and B one third. After the firm is formed, (a) who 
owns the stock of goods? (Z>) What makes up the firm capital? 

2. A, B, and C are partners carrying on business in the 
name of the '^ Acme Stove Polish Company." They buy land 
for partnership use, and receive a deed in which the grantee 
is named as the " Acme Stove Polish Company." Is the deed 
properly drawn? 



PEACTICE PEOBLEMS 337 

3. The firm of X and Y own a wagon which is used in 
the business. Y sells his interest in it to Z, and receives $25 
therefor. The next day X turns over the wagon to A in satis- 
faction of a debt due from the firm to A. Can A hold the 
wagon as against Z? 

§ 3. Pages 240-243 

1. A, B, and C are partners carrying on a dry-goods busi- 
ness. A and B decide to buy and do buy certain goods from 
D on credit, although C opposes it and tells D that he will 
have nothing to do with the transaction. The price is not 
paid. Can D maintain an action against A, B, and C for 
the price? 

2. Would your answer be the same if the articles bought 
were cows or sheep? 

3. Suppose A and B notify the firm debtors that all debts 
are to be paid to one of them. Thereafter, a firm debtor paid 
his debt to C. Does such payment discharge the debtor's 
liability to the firm? 

4. X and Y are in partnership as physicians. X buys a 
horse from Z, and gives a note for the price in the firm name. 
Can Z maintain an action against X and Y upon the note? 

5. Suppose X had falsely represented to Z that he and 
his partner were worth $1,000 over all debts, when they were 
worth nothing, and had thus induced Z to sell the horse on 
credit. Would Y be liable for the deceit? 

6. Would your answer be different if Y, after learning all 
the facts, continued to keep the horse and use him in the 
firm's business ? 

7. Suppose X treats a patient of the firm unskillfully, and 
thus causes him serious damage. Has the patient a claim 
against Y as well as against X? 

8. A tells B that he has a chance to buy a certain horse 
for $1,000, and asks B to become, an equal partner with him 
in buying, using, and selling the horse. B enters into such 
partnership, and the horse is sold for $1,200. In fact, all that 
A paid for the horse was $800, What are B's rights against A ? 



338 ESSENTIALS OF BUSINESS LAW 

§ 4. Pages 243-246 

1. A and B enter into partnership for five years. After a 
few months B refuses to have anything more to do with the 
business. What are A's rights against B? 

2. Suppose B, instead of withdrawing from the business, 
had become insane. What would A's rights be? 

3. The firm of A and B is dissolved by the death of B. 
What is to be done with the firm's real estate? 

4. Upon winding up the affairs of a partnership consisting 
of X and Y, all firm property, including the capital, was used 
in paying the creditors of the firm. X had contributed $10,000 
and Y $5,000. Has X any claim against Y, and if so for 
what amount? 

§ 5. Pages 246-248 • 

1. Give the definition of a partnership in the Uniform 
Partnership Law. 

2. Land is deeded to a partnership in its firm name of 
''Jones & Co." The members of the partnership are Thos. 
Jones, Ezra Barnes and William Brown. They sell the land 
and give a- deed from "Jones & Co." to the buyer. .Does he 
get a perfect title to the land? 

3. Suppose the three partners had been named as grantors 
in the deed. Would the purchaser get any greater rights than 
under the deed signed "Jones & Co."? 

4. X, a partner in the firm of Y & Co., transfers a horse 
owned by the firm to Z in payment of a debt which X owes 
him. Later a judgment creditor of the firm levies his execu- 
tion on the horse. Is he entitled to hold it as against Z? 

5. Is each partner an agent for the firm with power to 
bind his copartners by any contract he thinks fit to make? 

6. Has he power to turn over all the firm property to a 
trustee for the firm creditors? 

7. X, of the firm of Y & Co., seizes property in the posses- 
sion of M, a debtor of the firm, and sells it in satisfaction of 
the debt. It turns out to have been the property of Z. What 
are Z's rights against the members of Y & Co. ? 



PRACTICE PROBLEMS 339 

8. A is the owner of a promissory note signed by the firm 
of Y & Co. Can he maintain an action on the note against 
Y alone*? 

9. If a partner has been induced to enter a firm by false 
representations of the other as to the value of the property, 
and the profits of the business, what are his rights against 
the others? 

10. A partner pays $100 to persons who have saved firm 
property from destruction. Is he entitled to have this money 
repaid to him by the firm? Is he entitled to interest on the 
money from the time he paid it? 

PAUT II 

11. Under the Uniform Limited Partnership Act, when 
does a limited partner become liable as a general partner? 

PART III 

12. Describe the peculiar features of joint-stock companies. 

PART IV 

13. Define a corporation and tell how it is created. Give 
instances of Federal Corporations. Of what State is a cor- 
poration a citizen? 

14. What is the difference between the common stock and 
the preferred stock of a corporation ? Is a certificate of stock 
negotiable? How is it transferred by one person to another? 

15. Under the Uniform Stock Transfer Act, suppose the 
owner of a stock certificate has indorsed it in blank, intending 
to pledge it for a loan to be made him by a bank. On his way 
to the bank he loses it. The finder sells it to X, who pays full 
value for it, believing the finder was the true owner of it. 
What are X's rights to the stock? 

16. What does the holder of a certificate of stock warrant, 
when he sells and indorses it to another? 

17. A, the owner of a certificate of stock, loses it. He 
has never indorsed it. What should he do? 

18. To what extent are corporations subjected to super- 



g40 ESSENTIALS OF BUSINESS LAW 

vision, by State and Federal authorities, and for wliat pur- 
pose? 

19. What is the object of appointing a receiver of a cor- 
poration? What preference is given to debts incurred by 
receivers over the claims in existence when the receiver is 
appointed ? 

20. What are the rights of stockholders in the manage- 
ment of the corporation? To whom do they usually commit 
the management of its affairs? 

21. A banking corporation makes a contract to buy a rail- 
road. The owner of the road refuses to perform the contract. 
Can the bank maintain an action for damages against the 
owner ? 

22. The State of New York charters a manufacturing cor- 
poration. A few years later the State passes an act dissolving 
the corporation. What effect has the act on the rights of the 
corporation ? 

CHAPTER X 
§ 1. Pages 259-262 

1. X gives to Y a deed of the following property: One acre 
of land within defined boundaries; the right to drive to and 
from such land over other lands of X; all the loose stones on 
certain other lands of X, and certain promissory notes made 
by various persons, and owned by X. Which of the things 
thus deeded is corporeal real property? Which incorporeal 
real property? Which is tangible personal property? Which 
is a thing in action? 

2. A has gas pipes put into his dwelling house and gas 
chandeliers attached to the pipes. He also has book shelves 
put into his library, which are nailed to the floor and the 
wall. Thereafter he sells his house to B. Does the deed of 
the house convey to B title to these pipes, chandeliers, and 
bookcases ? 

3. Suppose A had been a tenant of the house when he put 
in these things. Would he have been entitled to take them 
away at the expiration of his lease? 



PRACTICE PROBLEMS 341 

§ 2. Pages 262-268 

1. A steals a slieep from B, and keeps it two years, shear- 
ing it each year. At the end of this time B discovers the 
sheep and the wool, and takes them from A. Is he entitled 
to keep them? 

2. A dies without having made a will, leaving both real 
and personal property. Who becomes the owner of such 
property ? 

§ 3. Pages 268-271 

1. A mortgages his house to B to secure the payment of 
$1,000 within a year. He fails to pay. What are the re- 
spective rights of A and B to the land? 

2. X owns certain real estate. Later he marries, and while 
his wife is living sells the land for full value to Y, and gives 
his warranty deed thereof. Has Y obtained a perfect title? 
If not, in what respect is it defective? 

■3. A sells and conveys certain land to B, who fails to 
record the deed. Thereafter A sells and conveys for full value 
the same land to C, who immediately records his deed. Can 
C hold the land free from any claim of B? 



CHAPTER XI 
§ 1. Pages 275-281 

1. A orally agrees with B to manufacture and sell to him 
a quantity of glassware for $100, each piece of glass to have 
B's monogram cut upon it. A tenders the glass in accord- 
ance with the agreement. B refuses to receive and pay for it. 
A sues B for the agreed price, and B sets up the statute of 
frauds. Can A recover? 

2. Would your answer be different if B had paid $1 
toward the price, or if he had received and kept one of the 
pieces of glass? 

3. Suppose A had tendered and B had received and kept 
a part of the glass, and when the balance was tendered, B had 



34:2 ESSENTIALS OF BUSINESS LAW 

rejected it because the monogram was not cut, but was 
painted upon the glass. Could A compel B to receive and 
pay for such balance? 

§ 2. Pages 281-287 

1. A offers to sell his horse Jack to B for $100 cash. B 
tenders the cash. Who owns the horse? 

2. A offers to sell his horse Jack to B for $100 as soon 
as the horse returns to A's stable. B pays the $100, and di- 
rects A to send the horse to him as soon as he returns to A's 
stable. Before he returns to A's stable he is killed by a stroke 
of lightning. Who owned the horse when he was killed? 
What rights, if any, has B against A? 

3. B looks at A's ox and says, ''If you will feed him up 
to good beef condition I will pay you $60 for him a month 
from to-day, and here is $1 to bind the bargain." At the 
end of the month A tenders the ox in good beef condition 
and demands $59. B refuses to receive and pay. Who owns 
the ox ? What are A's rights against B ? 

4. A in New York orders B in Buffalo to ship him 1,000 
bushels of white dent corn at $1 a bushel. B ships the corn 
as ordered and draws upon A for the price. Who owns the 
corn? 

5. Would your answer be the same if B had taken a bill 
of lading, making the goods deliverable to his order, and sent 
this to an agent in New York with instructions to hand it 
over to A upon the latter's paying a sight draft for the price? 

6. X steals Y's horse and sells it to Z, who pays full value, 
honestly believing the horse to be X's. Later Z sells the horse 
for full value to A. Can A hold the horse as against X ? 

7. Would your answer be different if A had been a pawn- 
broker, and had received the horse from Z as a pledge for 
money borrowed at the time by Z from A? 

§ 3. Pages 287-291 

1. A believing he has perfect titlp to a watch offers it for 
sale to B for $50, who pays the price and receives the watch. 



PRACTICE PROBLEM^ MS 

In fact, it was C's watch, and he takes it from B. What are 
B's rights against A? 

2. B orders 100 pounds of butter from A, who supplies 
that quantity of what he has bought in the market as butter, 
but which B upon examination discovers to be oleomargarine. 
Is B bound to keep and pay for this ? 

3. A orders a water filter from B, which will not work as 
a filter. What are A's rights against B? 

4. A sells his horse Jack to B for $100, who pays the 
money and demands the horse. C has a chattel mortgage on 
the horse, and refuses to allow A to give B possession of the 
animal. What are B's rights against A? 

5. A advertises for sale a farm wagon which is described 
as sound in every respect. B examines it after telling A that 
he has read the advertisement, pays the price and takes the 
wagon. The next day it. breaks down, and it is apparent that 
the part breaking was unsound when the wagon was sold. 
What are B's rights against A, assuming that A was ignorant 
of the unsoundness when he sold the wagon? 

§ 4. Pages 291, 292 

1. A sells his wagon to B for $50. Within an hour, and 
before B can take the wagon from the barn where it is stored, 
it burns. Who must bear the loss? 

2. What would your answer be if A's agreement was to 
sell the wagon to B the next day? 

3. A sells his horse to B for $100, which sum B pays at 
once. At the time of sale the horse is in X's boarding stable. 
B does not take him for two weeks. Who is liable for the 
horse's keep during that time? 

4. A says to B, You must sell me your horse Jim, and B 
turns the horse over to A, who takes him away. Can B main- 
tain an action against A for the price of the horse? If so, 
how is the amount of the price ascertained? 

§ 5. Pages 292-296 

1. A sells a stack of hay to B for $50, B paying $10 down, 
and is to pay the balance within three months. Before taking 



344 ESSENTIALS OF BUSINESS LAW 

and paying, B becomes insolvent. He sends men to take away 
the hay. Is A bound to let them take it? 

2. A sells a carload of wheat to B, taking his note at three 
months for the price. Before the wheat reaches B he becomes 
insolvent. What are A's rights over the wheat? 

3. The unpaid seller of certain goods stops them in tran- 
situ. What may he do with them? 

§ 6. Pag-es 296-299 

1. How has the Uniform Sales Act modified the provision 
of the statute of frauds? 

2. A makes an agreement with B for the present sale of 
the crop of potatoes which A promises to raise on his farm 
the following year. What is the legal eliect of the contract? 

3. A agrees to sell to B a piano,- which B is to pay for 
in instalments, and it is agreed that title is to remain in A 
until the entire purchase price is paid. After B has paid half 
the price, he fails to pay the next instalment when it falls due, 
and A takes the piano from B. What are B's rights against 
A? 

4. A sells a horse to B warranting that the horse is sound. 
After paying the price and taking title to the horse B finds 
that it is unsound. Is he entitled to return the horse and 
recover damages for B's breach of the contract? 



CHAPTER XII 
Pages 302-314 

1. What is a bank? How are banks classified? What is 
the difference between a bank note or bill, and the promissory 
note of an individual? 

2. For what purpose are savings banks organized? How 
do their business and practices differ from ordinary commer- 
cial banks? 

3. Name the services rendered to a community by the 
commercial bank. 



PRACTICE PROBLEMS 345 

4. Has a depositor the right to draw against checks as 
soon as he has deposited them ? What is a pass bopk and how 
should it be used by the depositor? 

5. Define the terms " loan," " discount " and " rediscount." 

6. Does a commercial bank pay interest to its depositors 
on their deposits ? What is usury, and what the liability of 
one who takes usury? 

7. Is a bank on which a check is drawn bound to cash it, 
if it has sufficient funds of the drawer on hand? 

8. What is the liability of one who gives a check for $100, 
knowing that he has but $10 to his credit? 

9. Has the drawer of a check the right to revoke it ? What 
should the owner of check do, upon losing it? 

10. If a bank pays a check, upon which the drawer's or 
the indorser's signature is forged, or which has been altered 
without the drawer's consent, is it entitled to credit itself with 
the payment? 

11. When should a check be presented to the bank on 
which it is drawn ? 

12. Describe the operations of a clearing house. 

13. For what purpose are farm loan banks organized and 
conducted ? 

14. Describe the Federal Reserve Bank system and the 
services it has rendered. 

15. What are the probabilities of American bankers play- 
ing a large role in international banking? 



INDEX 



Abstract of title, 271, 273. 



Acceptance, of offer, 35. 

must be absolute and unequiv- 
ocal, 39. 
of bill of exchange, 210, 213, 

'214. 
under statute of frauds, 280. 
Acceptor of bill of exchange, who 
is, 210, 212. 
liability of, 213, 214. 
Accident insurance, 200. 
Accommodation for passengers, 

172. 
Accommodation paper, 217. 
Acquisition of property, 259, 262. 
Act of God, 148-151, 159. 
Action, things in, 261, 299. 
Acts, may amount to offer or ac- 
ceptance, 35. 
principal's liability for agents', 

114-119, 124, 125. 
agent's or servant's liability 

for his, 116, 118. 
of bankruptcy, 188. 
Age, golden, silver, iron, lead, 2. 

at which infancy ends, 59. 
Agency, definition of, 101. 
how it originates, 101. 
by ratification, conditions of, 

101, 102. 
by operation of law, and by 

estoppel, 103. 
legal capacity of parties, 104. 

347 



Agency of attorneys, 106-108. 



of auctioneers, 108. 

of bank cashiers, 109. 

of brokers, 109, 

of factors, 110. 

of ships' husbands, 111. 

how terminated, 112, 113. 

of a partner, 241, 247. 
Agent, who is, 101. 

capacity of, 103. 

distinguished from servant, 
105. 

classification of, 105. 

difference between general and 
special, 106. 

attorney as an, 106-108. 

auctioneer as an, 108. 

bank cashier as an, 109. 

broker as an, 109. 

factor, or commission mer- 
chant as, 110. 

ship's husband and master as, 
111. 

liability of, for his own acts, 
116, 120. 

liability of, for unauthorized 
contracts, 120. 

liability of, for improperly ex- 
ecuted contracts, 121. 

rights of, against third parties, 
122. 

duties of, to principal, 123. 

of common carriers, 158-175. 



348 



ESSENTIALS OF BUSINESS LAW 



Agent, New York as central re- 
serve agent, 314. 
Agent of insurer, 202. 

a partner as. an, 241, 247. 
Anti-trust act, 70. 
Appointment of agents, lOl. 
Appropriation of goods to sale 

contract, 285. 
Approval, sale on, 284. 
Artificial person, 251, 254. 
Assent, mutual, necessary to a 

contract, 72-86. 
Assignment of contract, 90-92, 
212. 
notice of, 91. 
rights under, 90. 
by operation of law, 92. 
Attorney, at law, 106. 
in fact, 107. 
letter of, 107. 
Auctioneers, the agency of, 108. 
may sue in their own names, 
109. 
Authority of agent, 114-119. 
Authority of a partner, 241, 247, 
248. 

Baggage, what is, 174. 

carrier's liability for, 168, 174, 
175. 

time for removal of, 175. 

lien of carrier on, 175. 
Bailee, various examples of, 127. 

finder of goods as a, 128. 

postmaster as a, 128, 140, 141. 

duty of, in bailments for bail- 
or's sole benefit, 129. 

duty of, in bailments for 
bailee's sole benefit, 130, 131. 

duty of, in mutual benefit bail- 
ments, 133. 

postal oflicer as a, 140, 141. 



Bailee, innkeeper as a, 144- 
52. 

hirer of chattels as a, 152. 

who renders service about 
chattels, 154. 

common carrier of goods as, 
159-166. 

common carrier of passengers 
as, 170-175. 
Bailments, origin and modifica- 
tion of term, 127. 

usually result from agreement, 
128. 

confined to personal property, 
129. 

difi"er from sale or barter, 129. 

classification of, 130. 

for bailor's sole benefit, 130, 
131. 

for bailee's sole benefit, 132, 
133. 

mutual benefit, 134-136. 

pawn, pledge, or collateral se- 
curity, 136-139. 

postal, 140-144. 

in case of innkeepers, 144-152. 

hired used of chattels, 152. 

hired services about chattels, 
153. 
Bailor, meaning of term, 127. 

duties of, 133, 136. 

rights of, against postal offi- 
cials, 128, 140-144. 

who lets chattels, 152. 

fault of, 160. 

deception by, 160. 
Bankruptcy, of bailee or of bail- 
or, 131. 

severity of early laws of, 184. 

differs from insolvency, 185. 

legislation in United States, 
186. 



INDEX 



349 



Bankruptcy, State laws of, now 
suspended, 187. 

theory of modern legislation, 
187, 188. 

importance of Federal law of, 
188. 

who may be subjected to, 188. 

what are acts of, 188, 189. 

law of 1867, speech about, 
188 n. 
Bankruptcy, courts, referees, and 
trustees, 189. 

discharge in, 190. 
Banks, banking business, 302. 

classification of, 303. 

savings, 303. 

investment, 304. 

commercial, 304. 

deposits, 305. 

loans and discounts, 305. 

interest and usury, 306. 

checks, 307. 

forgery and alteration, 308. 

presentment of checks, 309. 

clearing houses, 309. 

state banks, 310. 

national banks, 311. 
.farm loan banks, 311. 

federal reserve bank, 312. 

bank notes, 313. 

international banking, 313. 
Bargain and sale, 281-285. 
Barter, how it differs from bail- 
ment, 129. 
Bill of exchange, form of, 206. 

foreign, why used, 207. 

inland, what is an, 208. 

drawee and acceptor of, 210, 
212. 

drawer of, 210, 215. 

parties to a, 210, 211. 
Bills of lading, 168, 300. 



Blackstone, Sir William, 1, 252. 
Bona fide holder, 226-231. 
Bond, definition of, 44. 

legal peculiarities of, 46-49. 
Breach of contract by one party, 

consequence of, 96-98. 
Buller, Mr. Justice, 21, 31. 
Business, definition of, 235. 

a common, 235. 
Business law, 10. 
Buyer, rights of, against seller, 
287-290. 

duties of, 263, 264, 291, 292. 

remedies of, 296-298. 

Capacity of parties, general 
rule, 57. 
when one is an alien, 57. 
in case of married women, 58, 
in case of convicted criminals, 

58. 
who are infants, 59-64. 
who are lunatics or drunkards, 

64-66. 
to agency, 104. 
Capital of a partnership, 237, 

245, 249. 
Capital of corporation, 253. 
Care required of bailee, 131, 133, 

153, 154, 159. 
Care required of carriers of pas- 
sengers, 170-175. 
Carmack amendment, 168. 
Carriers, common, definition and 
general duty, 158. 
may refuse to carry, when, 159. 
liability of, for goods, 159-166. 
regulations of, when reason- 
able, 164, 167. 
statutory regulations of, 165, 

167. 
of passengers, 170-175. 



350 



ESSENTIALS OF BUSINESS LAW 



Carriers, common, and stoppage 

in transitu, 294. 
Chancery, court of, 25. 
Charter of corporation, 251, 255, 

256. 
Chattel mortgage, 137, 271. 
Checks. See Negotiable Paper 
and Banks. 

form and definition of, 209. 

liability of bank on which 
drawn, 213 n, 307. 

certification of, 215, 307. 
Coins of United States, 96. 
Collateral security, 136-139. 
Commission merchants, 110. 
Common carriers. See Carriers. 
Common law, technical and dila- 
tory, 12, 25, 27. 

courts of, 12, 18. 

amalgamated with law mer- 
chant, 21. 

meanings of term, 23-25. 

of American States, 24. 

origin of, 26. 

flexibility of, 31. 

Bentham's view of, 31. 

Hale's encomium, 32. 

specific rules of, 32. 
Communication of offer, 42. 

of withdrawal, 42. 

of acceptance, 43. 
Condition, delivery upon a, 47. 

sale upon a, 283. 
Condition sales, 300. 
Consideration, necessity for, 44. 

in case of sealed contracts, 44, 
49. 

doctrine of, 49-52. 
Contracts, Roman law of, 7. 

joint, 11. 

chapter on, 33-97. 

definition of, 33. 



Contracts, obligations which are 

not, 34. 
differ from quasi-contracts, 34. 
may be made by acts, 35. 
require definite offer and prom- 
ise, 37, 38. 
withdrawing offer, 40. 
communication of offer, 42. 
communication of withdrawal, 

42. 
communication of acceptance, 

43. 
consideration for, 44-52. 
under seal, 44-49. 
capacity of parties to, 57-66. 
if illegal are unenforceable, 66- 

72. 
persons affected by, 86-89. 
rights and obligations under, 

86-89. 
assignment of, 90-92. 
discharge of, 93-100. 
breach of, by one party, 96- 

100. 
vital or fundamental term of, 

98. 
repudiation of, by one party, 

99. 
of agency, 101-123. 
how agent should execute, 

121. 
for bailments, 127-181. 
modifying carrier's liability, 

163,' 165, 173, 180. 
modifying telegraph company's 

liability, 177. 
discharge from, in bankruptcy, 

193. 
of insurance, 191-204. 
of indemnity, 197-201. 
which are negotiable, 206-231. 
of partnership, 232-249. 



INDEX 



351 



Contracts, by corporations, 255. 
for sale of personal property, 
275-301. 
Conversion, by bailee, 128, 

153. 
Conveyance of real property, 268- 

274. 
Copper and scales, conveyance 

with, 6. 
Copyright, title by, 264. 
Corporations, definition of, 251. 
how created, 251. 
charter of, 252. 
stock and stockholders of, 253, 

254. 
contracts by, 255. 
dissolution of, 255. 
receivers of, 256. 
federal, 256. 

transfer of stock in, 257. 
supervising, 258. 
Corporeal real property, 260. 
Courts, merchants', 12, 206. 
of staple, 12, 207. 
pepoudrous, 13, 17. 
of common-law, 12, 18, 26. 
of equity, 12, 16, 25. 
of bankruptcy, 189. 
Criminal liability of principal 
for acts of agent or servant, 
118. 
of finder of goods, 128. 
Crops as personal property, 261. 
Cummins amendment, 168. 

Damages when buyer is liable 
for, 292. 
action for, by buyer, 297. 
extraordinary special, 297. 
Dartmouth College case, 252, 

255. 
Death of oflFerer, 41. 



Death of former owner of prop- 
erty, 239. 
Deed, definition of, 45. 
delivery of, 46, 47. 
legal peculiarities of, 46-49. 
various kinds of, of real 
property, 268, 271. 
Defenses to negotiable paper, 

229-231. 
Delay in presenting negotiable 

paper, 220, 309. 
Delivery of a deed, 46. 

of a simple contract, 47, 218. 
necessary to validity of nego- 
tiable paper, 218. 
place of, in sale of goods, 290, 
Demand, paper payable on, 212, 
227. 
of payment of negotiable pa- 
per, 214, 219. 
Description, sale by, 288. 
Disaffirmance for fraud, 81, 82. 
Discharge of contract, 91. 

by performance or release, 93, 

95. 
by new contract, 94. 
by happening of stipulated 

event, 94. 
by performance, 95. 
by tender of payment, 96. 
by breach of one party, 97- 

100. 
in bankruptcy, 190. 
Disclosed principal, 119. 
Dishonor of negotiable paper, 

218-225. 
Dissolution of partnership, 243- 
245, 248. 
of corporations, 255, 256. 
Distribution of partnership prop- 
erty, 245, 248. 
Dower of widow, 267, 270. 



352 



ESSENTIALS OF BUSINESS LAW 



Drawee of bill of exchange, nec- 

cessity for, 212. 
Drawer of bill of exchange, who 
is, 210. 
liability of, 215. 
Drunkards, contracts of, 64-66. 
Duress, its forms and conse- 
quences, 82-84. 
Duties of principal to agent, 123. 
of agent to principal, 121, 122. 
Duties of bailee, 131, 132. 
of bailor, 133. 
of pledgee, 138. 
of seller of goods, 287-290, 

301. 
of buyer of goods, 291, 292. 

Easements, 260. 

Equity, courts of, 12, 16, 25. 

intervention of, 29. 

specific performance decreed 
by, 96. 
Escrow, what is an, 47. 
Estoppel, by deed, 48. 

agency by, 103. 

of insurer, 197. 

Factor as an agent, 110. 
Factors acts, 286. 
Farm loan banks, 311. 
Fault of bailor, 160. 
Federal reserve banks, 312. 
Finder of goods as a bailee, 128, 

131, 262. 
Fire insurance, 194-198. 
Firm, meaning of, 237. 

as a person, 237, 246. 

property of, 238, 247. 

creditors of, 239, 247. 
Fitness for particular purpose, 

289. 
Fixtures, 262. 



Forbearance, as a consideration, 

51. 
Foreign bill of exchange, 207, 

221. 
Forwarder, common carrier as, 

163, 168. 
Fraud, meaning of, 77. 

involves active misconduct, 78. 
may be practised by acts, 79. 
misstatement of opinion is not, 

80. 
consequences of, 81, 82. 
in obtaining signature to ne- 
gotiable paper, 231. 
Frauds, statute of, its object, 
53. 
evils resulting from, 54. 
Frauds, sections iv and xvii, 54, 
277-280, 299. 
does not avoid contracts, 55. 
as a nuisance, 56, 277-281. 
French law, limited partnership 

borrowed from, 249. 
Futures, definition and illegality 
of, 66, 67. 

Gift, title by, 266. 
God's-penny, 15. 
Goldsmiths as bankers, 209. 
Good faith, holder of negotiable 
paper in, 226-231. 
required of partners, 242. 
Guest, who is a, 145-152. 

treatment of, by innkeeper, 

146. 
rights of, against innkeeper, at 

common law, 148. 
rights of, modified by statute, 
148. 

Hale, Sir Matthew, 32. 

Hired use of chattels, 152, 153. 



INDEX 



353 



Holder of negotiable paper, 
rights of, how acquired, 225. 
who is a hona fide, 226-229. 

Holiday, paper falling due on, 
219. 

Holt, Lord, 18-20. 

Hotel. See Inn and Innkeepers. 

Husband and wife, property of, 
267. 

Illegality of agreements, 66-71. 
in case of agency, 112. 
for Sunday driving, 153. 
for partnership, 234, 243. 
Incorporeal real property, 260. 
Indemnity, insurance as a con- 
tract of, 197-201. ' 
Independent contractor, how he 
differs from agent or serv- 
ant, 119. 
Indorsee, who is, 211. 
Indorsement, nature of contract 
of, 216. 
various kinds of, 216, ^17. 
delivery necessary to, 218. 
Indorser, the payee as an, 210, 
211. 
liability of, 216. 
notice of dishonor to, 223-225. 
Infants, capacity of, to contract, 
59. 
who are, 59. 

legal force of contracts of, 60. 
ratification of contracts of, 62. 
repudiation of contracts by, 
63. 
Inland bill of exchange, 208. 
Inn, definition of, 144. 
Innkeepers, public nature of em- 
ployment, 144, 145. 
must receive whom, 145. 
treatment of guests by, 146. 



Innkeepers, liability of, for per- 
sonal injuries, 147. 

liability of, for guest's prop- 
erty, 148-151. 

rights of, 152. 
Insane. See Lunatics. 
Insolvency, differs from bank- 
ruptcy, 185. 

popular meaning of, 185, 186. 

State laws of, 187. 

in connection with stoppage in 
transitu, 294. 
Insurance, nature and origin of, 
191. 

mortuary tables for, 191. 

based on mercantile usage, 
192. 

earliest form of, maritime, 
193. 

fire and life, 194, 200, 204. 

misrepresentations in, 195, 
202. 

warranties in, 196, 202. 

waiver and estoppel in, 197. 

as a contract of indemnity, 
198. 

accident, 200, 201. 

notice to insurer, 201. 

agents of insurer, 202. 

standard insurance policy, 202. 

State insurance, 203. 

war risk insurance, 204. 
Intellectual productions, 263. 
Intention, to enter into contract, 
36. 

as to passing title to perspnal 
property, 283-285. 
Interest, agency coupled with an, 
112. 

of insured, in subject of in- 
surance, 195. 

on demand paper, 227. 



354 



ESSENTIALS OF BUSINESS LAW 



Interest, and usury, 306. 
International banking, 313. 
International copyright, 264. 
Intestacy, title upon, 265. 
Invention, as a source of title, 
263, 264. 

Jenckes, Congressman, speech 

by, 188 n. 
Joint contracts, 11. 
Joint-stock companies, are part- 
nerships, 250. 
capital of, divided into shares, 

250. 
statutory, 251. 

Kent, Chancellor, 1. 

Landlord and tenant, 262. 
Law merchant, nature and de- 
velopment of, 10-22, 206, 
210. 

modern ignorance of, 14. 

in sea codes, 15. 

international character of, 15, 
21. 

four meanings of, 22. 

its relation to insurance, 191- 
202. 

negotiable paper, 206-231. 
Law, nature and definition of, 1. 

social compact theory of, 2. 

grows, and is not invented, 4. 
Law, Roman, or civil, 4-7, 23. 

technical character of early, 
6-8. 

clothed in technical forms, 8, 

merchant, 10-22. 

common, 12, 23. 

agency by operation of, 103. 

terminates agency, when, 112. 

bailment by operation of, 128, 
131. 



Law, supreme, in the United 
States, 186. 

business usages become, when, 
210. 

dissolution of firm by opera- 
tion of, 243. 
Law of nature, 2, 16. 
Letter of attorney, 107. 
Liabilities, under contract, not 
assignable, 90. 

of principal, or master, 114- 
119. 

of agent to third persons, 120- 
122. 

of bailee, 132, 152, 154. 

of bailor, 133, 136. 

of pledgee, 138. 

of pawnbroker, 139-151. 

of postal officers, 141. 

of innkeepers, 145. 

of warehousemen, 155-158. 

of common carriers of goods, 
158-166. 

of common carriers of pas- 
sengers, 170-175. 

of insurers, 191-204. 

of telegraph companies, 177. 

of parties to negotiable paper, 
213-218. 

of partners, 241-248. 
Lien, of innkeeper, 152. 

of common carriers, 166. 

of seller of personal property, 
293. 

of warehousemen, 158. 
Life-insurance, 194, 196, 200-204. 
Limited partnership, borrowed 
from French law, 249. 

characteristics of, 249. 

how formed and managed, 
250. 

uniform law of, 249 n. 



INDEX 



355 



Lloyd's, its relation to insur- 
ance, 193. 
Losses of partnership, 245, 248. 
Lunatics, contracts of, 64-66. 
as partners, 244. 

Maine, Sir Henry, 8. 
Majority, powers of, in a part- 
nership, 240. 
Maker of promissory note, wlio 
is, 211. 
liability of, 214. 
presentment to, 214. 
Managing partner, 250. 
Mancipation, 6. 

Mansfield, Lord, relation of, to 
law merchant, 20, 21. 
his view of trade falsehoods, 

81. 
on liability of common car- 
riers, 160. 
Marine insurance, 193. 
Marriage, title by, 267. 
Married women, capacity to con- 
tract, 58. 
husband's right to property of, 

267. 
statutes relating to property 

of, 267. 
should sign deeds and mort- 
gages with husbands, 270. 
Market overt, 286. 
Marshall, Chief-Justice, 78, 252. 
Master, distinguished from prin- 
cipal, 105. 
of ship, 111. 

liability of, for servant's acts, 
114-119, 124. 
Mayhem, its relation to duress, 

83. 
Memorandum under statute of 
frauds, 279. 



Merchantable goods, 288. 
Merchants, law of, 10-22. 
courts of, 12, 13, 16, 17. 
encouraged to come to Eng- 
land, 12. 
usages of, 15, 18, 192, 206. 
contracts of, 99. 
Merger, doctrine of, 48. 
Mining partnerships, 251. 
Misrepresentation, as an inno- 
cent misstatement, 75, 76. 
when a term of the contract, 

76, 195. 
fraudulent, 77. 

in insurance • contracts, 195- 
197. 
Misstatement of fact, 80. 
Mistake, nature and conse- 
quences of, 72. 
by one party to a contract, 

73. 
due to act of third party, 74. 
as to existence of thing, 74. 
as to identity of thing, 75. 
Money, which is legal tender in 
the United States, 96. 
negotiable paper must be pay- 
able in, 211. 
negotiable paper as a substi- 
tute for, 228. 
Monopolies, their bearing upon 

contracts, 70. 
Mortgage, of chattels, 137. 

of land, 269. 
Mortuary tables, 191. 
Municipal law, definition of, 1. 

evolution of, 2-6. 
Mutual assent necessary to a 

contract, 72-86. 
Mutual benefit bailments, 134- 

136. 
Mutual savings banks, 303. 



356 



ESSENTIALS OF BUSINESS LAW 



Necessaries, liability of infant 

for, 60. 
what are, 6L 
I»J egligence, of bailees, 130, 132, 

135, 153, 154, 159, 170-175. 
exemptions of carriers from, 

163, 173. 
of telegraph companies, 176- 

178. 
Negotiable paper, originated in 

usage of merchants, 206. 
earliest form of, 206. 
inland bills as, 208. 
promissory notes as, 209. 
later forms of, 209. 
formal requisites of, 210-213. 
parties to, 210. 
must be payable in money, 

211. 
payable to order or bearer, 

212. 
liability of parties to, 213-218. 
for accommodation, 217. 
delivery necessary to, 218. 
how dishonored, 218. 
presentment of, 218-220. 
- protest of, 221-223. 

notice of dishonor of, 223-225. 
rights of holder of, 225-231. 
defenses to, 229-231. 
certificates of stock as, 254, 

257. 
exception to rule that seller 

can not give a better title 

than he has, 286. 
Negotiation, for a contract, 36. 
of commercial paper, 206-231. 
Northampton tables, 191. 
Notary public, presentment of 

paper by, 219. 
protest by, 221. 
notice of dishonor by, 223. 



Notice, of termination of agency, 
113. 
to insurer, 201. 
Notice, of dishonor of negotia- 
ble paper, 223-225. 
of defects in negotiable paper, 

229. 
of stoppage in transitu, 285. 
Nuncupative will, 265. 

Obligation, of contracts limited 
to parties, 86. 
substitution of third parties 

to, 87. 
interference of third parties 

with, 88. 
discharge from, in bankruptcy, 

190. 
of insurer, 195-202. 
of contracts, 255. 
Occupancy, title by, 262. 
Offer, and acceptance necessary 
to a contract, 35. 
must be definite, 37. 
withdrawing, 40. 
lapsing of, 41. 
communication of, 42. 
Oleron, laws of, 15, 21. 
Operation of law, agency by, 
103. 
bailment by, 128, 131. 
discharge by, in bankruptcy, 

190. 
dissolution of partnership by, 
243. 

Parties to negotiable paper, 210. 
Partner, who is, 232. 

capital of a, 237. 

creditors of a, 239. 

share of a, 239, 247. 

powers of a, 240-247, 248. 



L 



INDEX 



357 



Partner, liabilities of a, 221-227, 

228, 241-247, 248. 
Partnership, definition of, 232. 
agreement essential to, 232. 
specific intent not necessary, 

233. 
must be lawful, 234. 
sharing profits in a, 236. 
property of a, 237-239, 246. 
creditors of a, 239. 
how managed, 240. 
liability of, for a partner's 

acts, 241, 242, 247. 
good faith required in, 242. 
dissolution of, 243-246. 
effects, distribution of, 245, 

248. 
profits and losses of, how 

shared, 245, 248. 
limited, 249. 
joint-stock company as a, 

250. 
mining, 251. 
uniform act, 246-248. 
Part payment under statute of 

frauds, 286, 299. 
Passengers, common carriers of, 
170-178. 
care of, by common carriers, 

171. 
accommodations for, 172. 
treatment of, by carrier's 
agents, 172. 
Patents and Patent Office, 264. 
Pawn and pawnbrokers, 136-139. 
Pepoudrous courts, 13, 17, 206, 
Person, artificial, 251, 255. 
Personal property, what is, 259- 

262. 
Pledge, as a bailment, 136. 
differs from chattel mortgage, 
136, 137. 



Possession, things in, 261. 
title by, 263. 
seller's duty to give, 289. 
Postal bailments, 140-142. 
Post-office, its use, upon the dis- 
honor of negotiable paper, 
225. 
Potential existence, doctrine of, 

282, 300. 
Power of attorney, 107. 
Precedents, legal, none in mer- 
chants' courts, 14. 
in common-law courts, 28-30. 
principles deducible from, 30. 
Prescription, title by, 263. 
Presentment of negotiable paper, 

218-221. 
Price, necessary to a sale, 276. 
under statute of frauds, 277, 

299. 
buyer is under duty to pay, 
292. 
Principal, who is a, 101. 
legal capacity of, 104. 
distinguished from master, 

105. 
liability of, for agent's acts, 

114-119, 124. 
rights acquired by, through 

agent, 119, 120. 
duties of, to agent, 123. 
Proceedings on dishonor of pa- 
per, 218-225. 
Profits of a partnership, 236, 

245, 248. 
Promissory notes. See Negoti- 
able Paper, 
form of, 210. 
liability of maker of, 214. 
Property, meaning of term, 259. 
what may not be private, 259. 
real and personal, 259-262. 



358 



ESSENTIALS OF BUSINESS LAW 



Property, methods of acquiring, 
262-268. 
conveyance of real, 268-274. 
sales of personal, 275-301. 

Property of partnership, 237-245, 
246. 

Protest of negotiable paper, 221- 
223. 

Public enemy, 140, 149-160. 

Public policy, its relation to con- 
tracts, 68-70, 164, 173, 176. 

Public service companies, 179- 
181. 

Public utilities, 179-181. 

Qualified acceptance, 214. 
Quasi-contracts, 34, 60. 
Quasi-sale, 277. 
Quit-claim deed, 268, 271. 

Ratification, of infants' con- 
tracts, 62. 
of agency, 101. 
Real estate, of partnership, 238, 
246. 
definition of, 259. 
different forms of, 260. 
occupancy of, as source of 

title, 262. 
will of, 264. 
conveyance of, 268-274. 
Reasonable hour, 220. 
Receipt under statute of frauds, 

280, 299. 
Recording conveyances of land, 

270, 273. 
Regulations, of common car- 
riers, 164-175, 180. 
of telegraph companies, 177- 
180. 
Remedies, of the seller, 292-296. 
of the buyer, 296-299. 



Reports of legal cases, their 
character, 28. 

principles deducible from, 30. 
Repudiation of infants' con- 
tracts, 63, 64. 

by one party, before perform- 
ance is due, 99. 
Resale after stoppage m transi- 
tu, 296. 
Restraint of trade, contracts for, 

when illegal, 67-70. 
Rights, under contracts, how 
limited,. 86. 

of third parties under con- 
tracts, 89. 

assignability of, 90. 

of principal acquired through 
agent, 119. 

of agent against third persons, 
122, 123. 

of pledgee, 137. 

of bailor against postal offi- 
cials, 128, 140. 

of innkeepers, 152. 

of common carriers, 164-176. 

of insurers, 198, 202. 

of holder of negotiable paper, 
225-231. 

of firm creditors, 239-248. 

of partners, 240-248. 

of stockholders, 254. 

of buyer of goods, 287-290. 

of seller of goods, 291-292. 
Rules for determining when title 
passes, 283-285. 

Sales of personal property, im- 
portance of, 275. 

definition of, 276. 

distinguished from similar 
transactions, 276. 

formalities of, 277-280, 299. 



INDEX 



359 



Sales of personal property, when 
title passes, 281-286, 300. 
duties of seller, 287-290. 
duties of the buyer, 291, 292. 
remedies of the seller, 292-296. 
remedies of the buyer, 296-298. 
uniform act, 299-301. 
Seal, 45, 268, 269, 271. 
Seller, can not give a better title 
than he has, 286. 
duties of the, 287-290. 
rights of the, 291, 292. 
remedies of, 292-296. 
Servant, distinguished from 
agent, 105. 
liability of, for his own acts, 
116. 
Services, hired, about chattels, 

152-154. 
Share of a partner, 239, 245, 247. 
Ships' husbands as agents, 111. 
Skill required of bailee, 131, 132, 

134, 152, 154, 159, 174. 
Specialty, contracts by, 48. 
Specific performance, rarely com- 
pelled in sales of goods, 296. 
Staple, definition of, 12 n. 
statute of, 12. 
towns, 12. 
courts of, 13. 
Stare decisis, 28. 
Statistics, of insurance, 194, 
200. 
of sales of personal property, 
275. 
Statute, staple of, 12. 
law, 23, 24. 
affecting sealed instruments, 

49. 
of frauds, 52-56, 278, 299. 
modifying liability of innkeep- 
ers, 148. 



Statute modifying liability of 
common carriers, 165, 169, 
179. 
for limited partnership, 249. 
for joint-stock companies, 251. 
of incorporation, 252, 256. 
in behalf of married women, 
267. 
Stock exchange, 254. 
Stockholders of joint-stock com- 
panies, 250. 
of corporations, 253, 257. 
liability of, 253. 
power of, 254. 
Stock of corporations, 253, 257. 
Stoppage, in transitu, origin and 
nature of, 294. 
how exercised, 295. 
how defeated, 295. 
Surrender, right of resale after, 
296. 
of legal right as a considera- 
tion, 50. 
Survivorship, at common law, 
11. 
none by law merchant, 11. 

Tables for insurance, 191. 
Tally, accounts kept by, 15. 
Tavern. See Inn and Innkeep- 
ers. 
Telegraph and telephone com- 
panies, not common carriers, 
176. 
their liability, nature of, 176. 
may be changed by contract, 

177. 
to whom they are liable, 
178. 
Tender, of performance, 95. 
of payment, 96. 
money which is legal, 96. 



360 



ESSENTIALS OF BUSINESS LAW 



Termination of agency, 111-114. 
of bailments, 131. 
of carrier's liability, 162, 175. 
Testament. See Will. 
Themistes, nature of, 5. 
Threats, as an element in duress, 

84. 
Time, of presenting negotiable 
paper, 219. 
of giving notice of dishonor, 
224. 
Title, methods of acquiring, 262- 
268. 
conveyance of, to land, 243- 

274. 
abstract of, 271. 
when it passes by contract of 
sale, 281-286. 
Torrens land registration, 271- 

274. 
Tort, may be waived, 34. 

principal's liability in, 115- 

119, 124. 
agent or servant liable for his 

own, 116. 

by bailee, 128, 154, 170, 172. 

by telegraph company, 176-178. 

Transfer of negotiable paper, 

218, 228. 

of corporation stock, 254, 

257. 
of real property, 268-274. 
Treatment of passengers, 172. 

Ultra vires acts, 255. 
Undisclosed principal, 120. 
Undue influence, nature and 

consequence of, 85, 86. 
Uniform negotiable instruments 

act, 206-231. 
Uniform conditional sales act, 

300. 



L^niform partnership act, 246- 

248. 
Uniform limited partnership act, 

249 ti. 
Uniform sales act, 299-301. 
Uniform stock transfer act, 257. 
L^niform Torrens law, 271-274. 
Uniform warehouse receipt act, 

155-158. 
United States, common law in, 
24. 
legal-tender money of, 96. 
supreme law of, 187. 
Constitution of, relating to 

bankruptcy, 186-190. 
Constitution of, relating to 
contracts, 255. 
L^nwritten law, 23. 
Usages of merchants, 10-22, 23, 

192, 206. 
Usance, 206 n. 
L'se of chattels for hire, 152, 153. 

Value paid by holder of negoti- 
able paper, 228. 

Wager contracts in insurance, 

195. 
Waiver by insurer, 197. 
Warehousemen, duties of, 155. 
common carriers as, 161, 174. 
Warehouse receipts, 155-158. 
Warranty, in insurance con- 
tracts, 196, 202. 
deed, 269, 271. 
of title to personal property, 

287. 
of quality of personal prop- 
erty, 288-290, 301. 
express, what is, 290, 301. 
damages for breach of, 298, 
301. 



INDEX 



361 



Widow, dower of, 267, 270. 
Will, title by, 264. 

who may make a, 265. 

formalities of a valid, 265. 

witnesses to a, 265. 



Will, nuncupative, 265. 
Wisby, laws of, 15-21. 
Withdrawal of offer, 40. 
communication of, 42. 



(20) 



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